...investor has a portfolio of investments in the shares of a number of different companies, it might be thought that the risk of the portfolio would be the average of the risks of the individual investments. In fact, it has been found that the risk of the portfolio is less than the average of the risks of the individual investments. By diversifying investments in a portfolio, therefore, an investor can reduce the overall level of risk faced. There is a limit to this risk reduction effect, however, so that even a ‘fully diversified’ portfolio will not eliminate risk entirely. The risk which cannot be eliminated by portfolio diversification is called ‘undiversifiable risk’ or ‘systematic risk’, since it is the risk that is associated with the financial system. The risk which can be eliminated by portfolio diversification is called ‘diversifiable risk’,...
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...comparison with other companies within the industry. Discussion Capital Asset Pricing Model (CAPM) The assumptions that have been taken to calculate the cost of equity of the Lockheed Martin is: The Capital Asset Pricing Model is selected to compute the cost of capital. The risk free rate is assumed as the yield on the thirty years US treasury bonds. The S&P 500 is used as a proxy for the expected return for the market. Using the CAPM formulae: [pic] E (Ri) = Rf + βi (E(Rm) – Rf) Where, E (ri) is the expected rate of return of capital on the asset i. βim is the Beta (amount of risk with respect to the Market Portfolio) E (rm - rf) is the excess return of the market portfolio. (rm) Performance of the market. (rf) Return on risk free asset. RF = 3% (30 Year U.S. Treasury Bond Yield Forecast, 2012). RM =5.93 % (S&P 500, 2012). Market Risk Premium: [RM - RF] = 2.93 % Beta of Lockheed: 0.62 = 3+ (2.93)*0.62 = 4.8166 % Ans Next, I calculated the Weighted Average Cost of Capital (WACC) of the Lockheed Martin. The Cost of Debt of the firm is approximately around 7 % and the Cost of Equity as calculated above is 4.8166%. The proportion of the debt/capital ratio of the firm is 60 to 40 percent. The Tax rate for Lockheed Martin is 26 %. Accordingly the WACC = (Return on Equity x Equity Proporion) + (Cost of Debt x Debt Proporion x (1-Tax...
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...Company Background Pioneer Petroleum Corporation (PPC) was formed as a result of several independent firms that operate in oil refining, pipeline transportation, and industrial chemical field merging together. The company has been through several changes since it was established in 1924 and over the years it became an integrated company with many products and services such as plastics, agriculture chemicals, and real-estate development. In 1985, PPC became a hydro-carbons based company, concentrating on oil, gas, coal, and petrochemicals. PPC is also one of the primary producers of Alaskan crude giving it a 60% of their domestic petroleum liquid production. This gives PPC an advantage of being the lowest cost refiners in the West Coast by provide all of Alaskan crude oil, but it also requires a broad marketing network in the West Coast. Therefore, this integration required them to decrease their overall risk and optimize their overall performance through collaboration and coordination. Fact Pattern In 1991, PPC spend about $3.1 billion on capital expenditures and forecasted another capital expenditure of a $4.5 billion in 1991 (an increase from the previous year). However, it was largely due to these expenditures that the company was able to process heavy Alaskan crude oil more efficiently and also get a good return on their investment. For example, the light product yield in their refiners was higher than the industry average. Some of their investments were also...
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...individuals with 90 offices throughout the world by 1999. CDM’s growth was slowing down. Despite CDM had a complex appraisal and incentive system (BIPS program + annual review for staff not in the BIPS program) and paid out millions of dollars in incentives, part of CDM employees were not affected or properly motivated by the incentive system. The incentive problems would impact on CDM’s culture and long-term performance. CATWOE Analysis: Customers: CDM employees Actors: CDM management, HR Department, Compensation Committee & Appraisal Committee Transformation: employees not well motivated effectively motivated employees Worldview: The belief that an appropriate incentive program can influence employees’ behavior positively, and motivate employees to work toward the company goals. Owners: The board of directors of CDM Environmental constraints: Increased competition and declining profits, the slowdown of CDM’s growth, business margins not enough to expand incentive pool. Root Definition: A system to X (What the system does): influence employees’ behavior and performance, hence motivate people to do what is best for the firm (sell, do high quality work, budget, collect cash & take care of their people) Y (How it does): by means of objective and measurable appraisal process, fair structure and promotion system, and reasonable reward system. Z (why it’s being done): in order to push CDM’s business further, help CDM achieve its strategy goals, compete successfully in intense...
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...Global Cost of Capital Prerared by: Azizhon Isayev. Master of International Finance (XM-3) Tashkent Financial Institute. Global cost of capital is a financial term that is loosely defined and arrived at, but basically represents what the minimum expected rate of return can be for an investment in a foreign market that is sufficient to draw funds into that market. This is seen as an opportunity cost because it means that, when investors take risks in a particular foreign market, they are forgoing the opportunity of investing their capital assets elsewhere. Normally, the higher the risk, the higher the international cost of capital. This leads to the basic premise that emerging markets and developing nations have a higher international cost of capital both because they are more unstable markets and because the data available to analyze appropriate levels of risk for the investor is usually more unreliable or scarce than in first-world economies. Just as defining the concept of international cost of capital can be something of a fluid situation, arriving at actual figures for what it is market by market can also differ due to over a dozen different financial analysis approaches used to reach conclusions. While some of these methods produce closely similar results, others are ad hoc calculations that vary widely. One of the most common ways to look at the risk of investing in foreign interests and what type of returns these investments can offer is to approach the problem from...
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...Question #1. Estimate the individual WACCs for each of Teletech’s Segments. As you do so, carefully indicate any assumption in your calculations. By treating the two segments as a separate business this is what we discovered: CAPM - Telecommunications Services Rf = 4.235 Beta = 1.02 Rm-Rf = (9.5%-4.23%) = 3.77% Cost of equity = 4.23% +1.02(9.5-4.23%) = 9.6% WACC = (25% )(3.44%) + (75% )(9.6%) WACC = .0086 + .072 = 8.1% CAPM – Products and Systems Rf = 4.39% Beta = 1.4 Rm- Rf = (12%-4.39%) = 7.61% Cost of equity = 4.39% + 1.4(12%-4.39%) = 15.1% WACC = (75% )(4.48%) + (25% )(15.1%) WACC = .0336 + .0378 = 7.14% CAPM – Teletech Corporation WACC = 9.30% Conclusion: The decrease in the individual WACC’s prove that there is overall lower risk and should result in an increase in valuation of the firm. This is something that Victor Yossarian must have discovered and knows the company stock is undervalued. The cost of capital percentages used in our calculations where based on Exhibit 4 Debt-Capital-Market Conditions, October 2005. (Bruner Pg 231)The company’s current method of value-creation used hurdle rates and was used to calculate the WACC of Teletech. Management decision to accept the investments bankers’ calculation of the WACC of 9.3% is “split rated” and therefore strictly speculative. We are sure it was in the investments bankers’ best interest and not that of Teletech. This speculative WACC left room for error and Victor discovered...
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...list of Frequently Used Symbols and Notation A text such as Intermediate Financial Theory is, by nature, relatively notation intensive. We have adopted a strategy to minimize the notational burden within each individual chapter at the cost of being, at times, inconsistent in our use of symbols across chapters. We list here a set of symbols regularly used with their specific meaning. At times, however, we have found it more practical to use some of the listed symbols to represent a different concept. In other instances, clarity required making the symbolic representation more precise (e.g., by being more specific as to the time dimension of an interest rate). Roman Alphabet a Amount invested in the risky asset; in Chapter 14, fraction of wealth invested in the risky asset or portfolio AT Transpose of the matrix (or vector)A c Consumption; in Chapter 14 only, consumption is represented by C, while c represents ln C ck Consumption of agent k in state of nature θ θ CE Certainty equivalent CA Price of an American call option CE Price of a European call option d Dividend rate or amount ∆ Number of shares in the replicating portfolio (Chapter xx E The expectations operator ek Endowment of agent k in state of nature θ θ f Futures position (Chapter 16); pf Price of a futures contract (Chapter 16) F, G Cumulative distribution functions associated with densities: f, g Probability density functions K The strike or exercise price of an option K(˜) Kurtosis of the random variable x x ˜ L A lottery...
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...from scientific research I ‘_ Marries fundamental analysis and financial statement analysis – Exploits accounting as a system for measuring value added – Exposes good (and “bad”) accounting from a valuation perspective L Financial Statement Analysis and Security Valuation • • • Integrates financial statement analysis with corporate finance Focuses on technologies that can be used in practice – Based on real world examples Adopts activist point of view to investing – The market may be inefficient 0-1 What Will You Learn from the Course Part I Financial statements and valuation Ch. 1-7 • How intrinsic values are calculated • What determines a firm’s value • How businesses are analyzed to assess the value they create • How financial analysis is developed for strategy and planning • The role of financial statements in determining firms’ values • How to pull apart the financial statements to get at the relevant information • How ratio analysis is employed in valuation • How growth is analyzed and valued • How to calculate the P/E and P/B ratio and what they should be • The value of operations • How to make forecasts and develop valuations • How to assess the quality of the accounting 0-2 _c I- By the end of the course, students should be able to develop earnings forecasts and then use the forecasts to value equity and form investment recommendations, much the same as what financial analysts do in the market. Microsoft Corporation MSI-T lNa=d~1l...
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...Unit 6 CASH BENEFITS 6.1. Efficiency and equity in retirement pensions 6.2. Efficiency and equity in unemployment benefits 6.3. Efficiency and equity in poverty relief INTRODUCTION New unit → 1st Economic fundamentals of the Welfare State 2nd Welfare State programs cash benefits in-kind benefits - There is a complex set of cash programs - Quantitative and qualitative differences Some of the most important goals of the WS are channeled through cash benefits - income and consumption smoothing - insurance - poverty reduction - redistribution - social solidarity Main questions - What justifies public pensions? - What are the main schemes? - Is capitalization (funded pensions) a viable alternative? 1. INSURANCE, EFFICIENCY AND EQUITY IN PUBLIC PENSIONS a) Efficiency - Any individual should achieve an efficient level of retirement income → rational insurance ⇒ a risk averse individual will buy future pensions if the net price of insurance is lower than the value given to certainty Public o private pensions? Private markets are efficient if there is perfect competition, perfect information and no other market failures. Conditions (a follow-up): 1.- independent probabilities 2.- known probabilities (less than one) 3.- no adverse selection 4.- no moral hazard Inflation → private markets cannot supply insurance against unanticipated inflation (to guarantee the real value of pensions) : 1.- the probability of future levels of inflation is unknown 2.- inflation is...
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...Marketing Plan For [pic] Telecommunication RF Design, Optimization, and Microwave Links Table of Contents 1.0 Executive Summary 3 2.0 Situation Analysis 4 2.1 Market Summary 4 2.1.1 Market Demographics 4 2.2.1 Market Needs 5 2.1.3 Market Trends and Market Growth 6 2.2 SWOT Analysis 7 2.2.1 Strengths 7 2.2.2 Weaknesses 9 2.2.3 Opportunities 9 2.2.4 Threats 10 2.3 Competition 11 2.3.1 Identifying Competition 11 2.3.2 Competitive Strategies 12 2.4 Service Offering 14 2.5 Keys To Success and Critical Issues 14 2.7 Location Of NeWave Marketing Areas 16 3.0 Marketing Strategy 17 3.1 Marketing Mission 17 3.2 Marketing Objectives 17 3.3 Financial Objectives 18 3.4 Target Markets 19 3.5 Positioning 20 3.6 Strategies 21 3.7 Marketing Mix 21 3.7.1 Service Marketing 21 3.7.2 Pricing 22 3.7.3 Promotion 23 3.7.4 Place 26 3.8 Marketing Research 27 4.0 Financials 28 4.1 Break-even Analysis 28 4.2 Sales Forecast 29 4.3 Marketing Communication Budget/Expense 30 5.0 Controls 30 5.1 Implementation 30 5.2 Marketing Team 32 5.3 Contingency Planning 33 6.0 Summary 33 1.0 Executive Summary NeWave is a new company with an office in the United States of America and Nigeria, engaged in RF telecommunication network design, optimization, and microwave backhaul design. In addition, the company shall engage in network drive test and data collection. The Chief Executive...
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...Copyright c 2005 by Karl Sigman 1 Capital Asset Pricing Model (CAPM) We now assume an idealized framework for an open market place, where all the risky assets refer to (say) all the tradeable stocks available to all. In addition we have a risk-free asset (for borrowing and/or lending in unlimited quantities) with interest rate rf . We assume that all information is available to all such as covariances, variances, mean rates of return of stocks and so on. We also assume that everyone is a risk-averse rational investor who uses the same financial engineering mean-variance portfolio theory from Markowitz. A little thought leads us to conclude that since everyone has the same assets to choose from, the same information about them, and the same decision methods, everyone has a portfolio on the same efficient frontier, and hence has a portfolio that is a mixture of the risk-free asset and a unique efficient fund F (of risky assets). In other words, everyone sets up the same optimization problem, does the same calculation, gets the same answer and chooses a portfolio accordingly. This efficient fund used by all is called the market portfolio and is denoted by M . The fact that it is the same for all leads us to conclude that it should be computable without using all the optimization methods from Markowitz: The market has already reached an equilibrium so that the weight for any asset in the market portfolio is given by its capital value (total worth of its shares) divided...
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...when discounted at the appropriate cost of capital. Further, the company is contemplating using either multiple cutoff rates instead of a single companywide rate to determine the cost of capital for each division. The suggestion was that these multiple cutoff rates would determine the minimum acceptable rate of return on proposed capital investments in each of the main operating areas of the company and would represent the rate charged to each of the various profit centers for capital employed. Issues: Did Pioneer compute WACC correctly and if not what did they do wrong? Compute your own. How should the company determine a minimum rate of return: by (1) a single cutoff rate based on the company's overall WACC or (2) a system of multiple cutoff rates that reflect the risk-profit characteristics of the several businesses? Analysis: Pioneer Petroleum Corporation did not calculate the WACC correctly. Starting with the cost of debt, the formula is Kd = I(1 T) where I is the interest rate and T is the tax rate. The company's tax rate is 34%, however, they made the mistake of using the coupon rate of 12% for the interest rate. The coupon rate is a sunk cost and, therefore, the market rate of interest should be used reflecting the cost of new debt. I assumed the interest rate to be 8% because the company's debt was rated A, which indicates low risk. Further, Pioneer's method for coming up with the cost of equity is incorrect. Their...
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...Copyright c 2005 by Karl Sigman 1 Capital Asset Pricing Model (CAPM) We now assume an idealized framework for an open market place, where all the risky assets refer to (say) all the tradeable stocks available to all. In addition we have a risk-free asset (for borrowing and/or lending in unlimited quantities) with interest rate rf . We assume that all information is available to all such as covariances, variances, mean rates of return of stocks and so on. We also assume that everyone is a risk-averse rational investor who uses the same financial engineering mean-variance portfolio theory from Markowitz. A little thought leads us to conclude that since everyone has the same assets to choose from, the same information about them, and the same decision methods, everyone has a portfolio on the same efficient frontier, and hence has a portfolio that is a mixture of the risk-free asset and a unique efficient fund F (of risky assets). In other words, everyone sets up the same optimization problem, does the same calculation, gets the same answer and chooses a portfolio accordingly. This efficient fund used by all is called the market portfolio and is denoted by M . The fact that it is the same for all leads us to conclude that it should be computable without using all the optimization methods from Markowitz: The market has already reached an equilibrium so that the weight for any asset in the market portfolio is given by its capital value (total worth of its shares) divided by the total capital...
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...email : daniela.hincu@man.ase.ro Abstract Commercial banks represent the core of the credit for any national economy. In turn, the credit is the engine that put in motion the financial flows that determine growth and economic development of a nation. As a result, any efficiency in the activities of commercial banks has special implications on the entire economy. That is why we consider very useful to present an analysis of possibilities for evaluating the performance in the commercial banks. The management of every commercial bank must establish a system for assessing investment performance which suits its circumstances and needs and this evaluation must be done at consecutive intervals to ensure the achievement of the Bank's investment objectives of hand; and to know the general direction of the behavior of investment activity in the past and therefore predictable as it in the future on the other hand. The main objective for this paper is to analyze some quantitative methods used in assessing the performance of investment activity in commercial banks (such quantitative models, financial indicators etc.); consequently, we will present the risks that a commercial bank faces in managing assets and liabilities. Keywords : commercial indicators, models, risks bank, performance, in Romania, the banking system has seen an accelerated development, both in terms of quantity, as particularly in terms of quality. In the context of the challenges...
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...Week Four Exercises The assigned exercises for week four of Business Research (BUS642) at Ashford University are as follows: Terms in Review, 1-4, on page 204 and answering questions 1-3 over the case study: Ramada Demonstrates its Personal Best. Terms in Review, #1-4, p 204 1. Compare the advantages and disadvantages of the survey to those of observation. Each method has its own set of advantages. Surveys allow the researcher to use the largest possible sample sizes while at the same time making the data quantifiable and easily sorted. Survey results are more reliable than personal observations and therefore are less biased when the survey questions are worded and asked correctly. Surveys are time consuming for both the participant and the researcher. It may be difficult to find a time that is convenient for both parties. Surveys also seek to answer specific questions whereas observation may be taken to mean any number of things and the data may be used in a random and haphazard manner. By using observation, the researcher is able to carry out research without interfering with the subject’s daily life and activities. Observation is also able to be carried out in an unobtrusive manner that allows the researcher to gather the needed information without having to ask a lengthy series of questions. Observation is quicker and less expensive than conducting research. Observation is conducted in the subject’s natural environment allowing for a true representation of action without...
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