Wait a second!
More handpicked essays just for you.
More handpicked essays just for you.
Capital asset pricing model
Stock investment analysis
Capital asset pricing model
Don’t take our word for it - see why 10 million students trust us with their essay needs.
Recommended: Capital asset pricing model
Purchasing of a product or an item with an aim of profit generation via the purchased item can be viewed as investing and the item, an investment. Before purchase, an estimate of the potential market value of a financial asset or liability has to be determined, that is, analyzing the investment. The analysis has to take into consideration various issues such as the overall state of the economy, interest rates, competitive advantage and many others. The analysis can be technically or fundamentally carried out but financial forecast has to be considered (Tutor 2 U, 2011).
Since investments’ main aim is profit maximization, cost, output and returns are factors of value. To determine these factors and verify the profit, a market research on the investment has to be conducted. This is mainly to avoid losses. The main factor that has to be determined is the balance between the product’s supply and the demand at a certain price that is, market equilibrium (Aarhus school of business, 2004).
Market equilibrium enables an investor to determine the type of investment to engage in based on the returns, set prices and determine the level of demand hence establish the supply required. It also enables the investor to know when to supply more or less depending on the market price prevailing (Aarhus school of business, 2004).
Most of the investments are always mainly on assets. There are several models of equilibrium asset pricing among them Capital Asset Pricing Model (CAPM), Fama and French three-factor model. Both though may have setbacks, Fama and French three-factor model is preferred than the Capital Asset Pricing Model (Jonathan burton, 1998).
Capital Asset Pricing Model is believed to be the first equilibrium asset pricing model t...
... middle of paper ...
...odels (MJ Brennan, 2008).
References
Aarhus School of Business, (2004). Fama And French Behavioralists.Test for the CAPM and the
Three-Factor Model for the Spanish Stock Market. Retrieved From:
http://pure.au.dk/portal-asb-student/files/2311/000130199-130199.pdf
Jonathan Burton, (1998).Revisiting The Capital Asset Pricing Model. Retrieved From:
http://www.stanford.edu/~wfsharpe/art/djam/djam.htm
M.Bonomo, R. Garcia, (1994).Can A Well Fitted Equilibrium Asset-Pricing Model Produce
Mean Reversion. Retrieved From:
http://onlinelibrary.wiley.com/doi/10.1002/jae.3950090103/pdf.
MJ. Brennan, (2008).Equilibrium Asset Pricing. Retrieved From:
http://www.efmaefm.org/.../equilibrium%20Asset%20Pricing%20%5B1%5D.ppt
Tutor 2 U, (2011). Equilibrium Market Pricing. Retrieved From:
http://www.tutor2u.net/economics/revision-notes/as-markets-equilibrium-price.html.
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
A couple of Squares has a limited capacity for which to produce their products and smaller companies tend to have larger fixed costs than bigger companies. Therefore, A Couple of Squares must maximize profits in order to ensure that they will stay in business. A profit-oriented pricing objective is also useful because of A Couple of Squares’ increased sales goals. A Couple of Squares increased their sales goals due to recent financial troubles. Maximizing profits is the easiest way to meet these sales goals due to the fact that A Couple of Squares has limited production capacity. The last key consideration favors a profit-oriented pricing objective because A Couple of Squares offers a specialty product. A specialty product often has limited competition, therefore can be priced on customer value. Pricing at customer value will maximize profits as well as customer satisfaction. A Couple of Squares’ lack of production capacity, increased sales goals, and specialty product favor a profit-oriented pricing
While analyzing the data for The Body Shop International case, I noticed some trends and have compiled my assumptions for the next three years. I have compiled pro-forma statements for the fiscal years 2002, 2003 & 2004. These figures are based on the percentage of sales method for pro-forma financial modeling. Simply put, I used the sales figures from the past three years 1999, 2000 & 2001 and applied a growth rate of 13% increase to sales. Below are some additional assumptions that I have created to illustrate how the firm can become profitable while increasing market share and maintaining stockholder interest within the firm over the next three years.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Present theoretical arguments for the choice of net present value as the best method of investment appraisal;
The execution of our investment strategy occurred in three stages. First, we invested in t-bills and bonds according to our original set out investment plan. This was to decrease potential losses and risk associated with the declining equity market. Therefore, we invested about two hundred thousand of our funds into these low risk assets to maintain buying power. Due to inflation, we did not want to lose buying power by leaving funds in an account without earning interest. Further, we invested a small portion of funds into the commodity market. With a slumping equity market and a positive outlook on the gold commodity, we invested in Gold Corporation at the same time we invested in income assets.
As with all markets and their respective economies, having equilibrium is one of the key factors of a successful system. Although most markets do not reach equilibrium, they attempt at getting close. There are numerous methods devised to reach equilibrium, whether they involve human intervention directly or a cumulative decision by all factors involved. These factors may be a seller's willingness to lower overall revenue, or a buyer's willingness to withhold some demand for a certain product. Of course, the basics of supply and demand retrospectively control the equilibrium in the market.
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
In the absence of government intervention, price is determined by demand and supply. The equilibrium price is where demand and supply are equal. At this point there are no forces causing the price to change. The quantity which consumers want to buy will equal the quantity which producers want to sell at the current price.
Analyzing in terms of investment, if a private investor puts money into a company he has an expectation of both risk and return on the investment. Given a particular level of risk, the investment needs to be expected to have a particular level of return. For example, investment in a start-up needs to have the potential for a very high return, given the higher risk of failure, while investment in a large established business can be coupled with a lower expected return, given the lower risk of failure.
The purpose of this paper is to give a clear understanding of discounted cash flow valuation. The paper will explain what a discounted cash flow valuation is and its importance in financial business decisions regarding investment strategies. This paper will give a detailed discussion about discounted valuations for both present and future multiple cash flows with respect to even and uneven schedules using clear step-by-step examples. Also included will be some advantages and disadvantages in using the discounted cash flow valuation method for corporate business. Finally, the paper will give a summary of important highlights discussed in the body of the paper.
When looking at managerial economics and how it affects a business many things are to be considered, many factors are present that need to be assessed. After all, each business is unique in what they do, what they have to offer consumers and how they manage that demand; all this is different from company to company. Managerial economics is the “economic analysis required for various concepts such as demand, profit, cost, and competition” (Business Firms and Decisions, n.d.). Within this paper, we will discuss the different tools that companies use in order to arrive at solutions that best aid in achieving superlative results. We will explore such topics as the roles of prices, profit maximization, substitution input in production, and how these concepts apply to institutions. Can these methods be applied to bigger institutions like the military or a city hall? Can an institution operate inefficiently in a market? Can an organization afford to waste resources, and if so, at what cost and for how long.?
Valuations and share prices forecasting has key position in finance as they represent one of the source for value perception of the corresponding companies shares. There are four approaches to valuation. The first is discounted cash flow valuation in which the present value of expected future cash flows of the asset gives the value of an asset. The second is accounting valuation in which book value if assets is used for valuing the firms assets. The third is relative valuation in which comparable assets like earnings, cash flows and book value measure the value of companies assets by. Forth approach is contingent claim valuation in which the value of assets id determines by using option pricing models.
Our understanding and the concept of investment in behavioural finance combines economics and psychology to analyse how and why investors make final decision. As an investor one’s decision to invest is fully influence by different type of attitudes of behavioural and psychological ( Ricciardi & Simon, 2000). Yet, in order to maximize their financial goal, investors must have a good investment planning. Furthermore , to gain a good investment planning , there must be a good decision making among investors. They have to choose the right investment plan I order to manage the resources for different type of investments not only to gain profit wise but also to avoid the risk that occur from investment.
The Modern portfolio theory {MPT}, "proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.