Thursday, April 4, 2019
Net present value and other investment
Net fork up think of and other enthronisation inquire 1List the methods that a firm give the sack work to evaluate a potential enthronisation.The methods apply to evaluate a potential enthronement of the firm atomic number 18 as followsNet exemplify measure appear(NPV)Internal rate of think(IRR)Profitability index(PI)Cash discounted flowPay rear periodAccounting rate of return(ARR) perplexity 2Why is the NPV a preferred method when evaluating a potential investment opportunity?Npv can be explained as the difference surrounded by the initial salute outlay and the present value of the future cash flows. The total present value of the yearly benefit cash flow is the Net present value.Net present value may be used to find the value or reliability of any(prenominal) investment and also to decide if it is far go than the other investments in the commercialize. It is considered to be a potential investment if the NPV is positive a deleterious investment decision if the NPV turns out to be negative. Whereas, if the NPV is equal to 0 the decision is indifferent, it can be either trustworthy or rejected based on other alternates/factors.Question 3What is the IRR? How is it connect to the NPV? Is the IRR al trends an trenchant method when evaluating a potential investment opportunity, and why?IRR is the internal rate of return. It is really closely related to NPV, except for a fact that IRR uses only single discount rate, which serves as an advantage also a major limitation. It equ aloney proportionates the discount rate of the present value of the future cash flows with the initial investment. However, IRR is non very effective when it comes to multiple cash flows (particularly with both positives negatives)IRR equates in surrounded by initial investment and the present value of future cash flows whereas NPV gives the difference between the initial cost outlay and the present value of the future cash flows. IRR illustrates the advantages of the project, and NPV decides the best investment opportunity than the other investments.Despite all cons, IRR is still a very popular approach to investment decision amongst managers for its simplicity also the fund managers prefer to watch a percentage rather than a sawbuck value.Question 4Using the article from the Sydney dawn forebode, discuss why John Whiteman, the senior portfolio manager at AMP Henderson, can be considered competent in respect of his bourgeon plectrums. Why would it benefit fund managers to use discounted cash flows when picking stocks?As per the article on Sydney Morning Herald, John Whiteman his team were considered to be skilled for the following reasons-The DCF approach to picking stocks has always proved to be a successful option to John Whiteman. He claims that the DCF approach to operative out todays sh be price, given the future cash flows of the business is the most efficient effective way to estimate the time value of money. Since the disc ount rate addresses the two main criteria involved in any investment (time value of money jeopardy), the fund managers consider it to be very useful effective, despite all its complexities. Also the long term forecast(10 yrs ahead) coupled with the DCF approach has enabled the AMP Henderson team to make wise investment decision over the last few years.Discounting the future cash flows to todays dollar helps in knowing the stock worth/business value of the firm as on date. As we all know, a dollar today is worth more than a dollar tomorrow. The DCF approach once again proves the current value of the business is the most important aspect when it comes to investment decisions.Question 5A firm that pays out 65% of its earnings as dividends has an accounting rate of return of 20%. Its P/E proportionality is 10 and its earnings per share is 108 cents.What is the price per share?What is the dividend yield?If shares were bought, what would be the payback period? direct the only return is the dividend.What is the net book value per share of the asset investment of the company?If the guess-adjusted postulate rate of return is 6%, what would be the NPV per share for buying shares?Would you buy shares using AROR or NPV?Chapter 11-Return, peril and the Security Market LineQuestion 1Discuss how put on the line is associated with the variances on an assets expected return. What are some of the factors that come into play with respect to changes in the price of a particular security in the market?Investment, risk of exposure return are closely related to to each one other. The utmoster the investment the risk the greater will be the return. All investment decision involves risk. The deviation is the difference between the unquestionable the expected return and is directly proportional to the risk taken. Variance is the average squared deviation between the actual return and the average return In short standard deviation is the square foundation of the varianc e.Question 2What is risk with respect to investment? Identify the two typecasts of risk and discuss each one. Which is the most important type of risk? Why can only one type of risk be mitigated or eliminated?Risk and investments are proportional, that it depends on the market strategic values, like the high risk you take the high returns you expect.Risks associated with individual assets, are of two typesSystematic risksNon- organized risksSystematic risks are the risks which work large number of assets may be to a greater or smaller extent. These risks influence market wide effects, so these are called market risks.Non- doctrinal risks are that affects a single asset or a small group of assets, as these risks are unusual to individual companies or assets these are called as unique or asset-specific risks.Only one type of risk can be mitigated or eliminated, which is non-systematic risk, because these type of risks can be reduced or primarily avoided as it causes to a single ass et or small group of them, but when you consider with systematic risk, it causes affect to the wide-range of assets or to an larger extent which couldnt be reduced or completely avoided.Question 3What is important? How does beta relate to systematic risk?Beta is a key component for the capital asset pricing model and is used to search the cost of equity or the risk involved. It is the covariance of the return of an individual stock with the market proxy portfolio return divided by the variance of the markets proxy return. A beta of 1 implies the asset has the same systematic risk as the overall market less/more than1 implies lesser/greater risk respectively.Question 4What is the SML? What is the CAPM, and how does the SML relate to the beta coefficient?SML(Security Market Line) is the pictorial representation of the market equilibrium. The slope of the SML is based on the reward to risk ratio at SML the beta is always considered to be 1. A more spoiled stock will have a higher beta and will be discounted at a higher rate as opposed to the less sensitive stocks which will have lower betas and be discounted at a lower rate.CAPM is Capital aaset pricing model which is an equilibrium model of sexual intercourseship between risk and return, the equation of the SML showing the relationship between the expected return and beta.Beta coefficient is the amount of systematic risk present in a particular insecure asset relative to an average risky asset.we need the measuring level of systematic risk for different investments.The specific measurements that we use is called bets coefficient.Given beneath is the graphical representation of how SML relates to the beta coefficient.Question 5Using the article from The Sydney Morning Herald, discuss how diversification is used to bring about a positive outcome for retail investors. Why do investment portfolios with different asset classes need to be continually monitored? What are some alternative asset classes that inv estors can diversify into?Diversification is that which reduces the risk,when into investing some assets will do very well,some will do very badly and most will perform upto expectations.Those which do very well will equivalate the very bad done assests minimising the risk with little variation to get the positive outcomes.Diversification reduces unsystematic risk,according to the Sydney Morning Herald diversification gives mostly with possible positive outcomes for the investment made which enhances the minimisal of the risks taken by the retail investors.However ,the risk of holding common stock cannot be completely eliminated by diversification.Asset classes is a group of investments that parade similar characteristics viz., shares, bonds, property or cash rather than the same basket,which mitigates the risk involved in the investments.Question 6Assume that you have the betas of all the companies listed on the ASX. Now you select 20 shares based on their betas and, by investing an equal amount in each share, you create a portfolio with a beta of 1.1. You make sure you select shares with betas ranging in value from 0.4 to 2.4.Is this likely to be an efficient portfolio?Is the portfolio likely to be well diversified?Is the portfolio likely to have much non-systematic risk?Question 7Now your cream is based upon putting the company names into a hat and withdrawing 20. Revisit Question 6 with relation to this portfolio.