- AirTech is considering acquiring either SolarTech or BioTech to expand its business and reduce risk. Both targets could revolutionize data center locations using solar panels or biomass plants.
- An analysis of the companies' historical data from 2006-2014 found that SolarTech had the highest returns but also highest volatility, while BioTech had lower returns but lowest volatility.
- When estimating future cash flows, BioTech was found to have a higher net present value than SolarTech due to a higher initial cash flow and lower cost of capital.
- Assessing the diversification potential of adding each target found that acquiring SolarTech would increase AirTech's returns and reduce volatility the most, while acquiring BioTech would provide less volatility
This document discusses different methods for estimating the cost of equity for Aero Pieces, an aircraft parts company, by incorporating industry risk. It compares using the Capital Asset Pricing Model with an industry risk premium, versus the traditional build-up method which factors industry risk into the company-specific risk premium. Applying each method using equity risk premium data from different sources, the estimated cost of equity for Aero Pieces ranges from 12.40% to 15.80%.
The document summarizes key changes in the Basel Committee's revised market risk framework, known as Fundamental Review of the Trading Book (FRTB). It introduces more complex capital calculations under the internal models approach, with requirements for multiple scenario analyses and risk factor combinations that significantly increase processing needs. It also requires clearer position classification and metadata for regulatory capital calculations. Banks will need enhanced data management and risk aggregation capabilities to integrate information across business units. The substantial technology impacts suggest a long-term, flexible implementation approach rather than short-term minimum compliance.
Week 3 General Electric ReportChad Uhler, Chaka Birde.docxcockekeshia
Week 3: General Electric Report
Chad Uhler, Chaka Birdette, Sharitza Bailey, Amy Piper
ACC/491
June 26, 2017
Alisa Dumond
1
12
Week 3 Scenario Assignments
Table of Contents
Section 1
Introduction…………………………………………………page 3
Initial Risk assessment……………………………………...page 3-5
Section 2
Analytical Procedures………………………………………page 5-6
Analysis of Ratios…………………………………………..page 6-7
Section 3
Materiality………………………………………………….page 7-8
Misstatement……………………………………………….page 8
Audit Risks…………………………………………………page 8
Audit Risk Model…………………………………………..page 8
Inherent Risks………………………………………………page 9
Relationship of Risk to Audit Evidence……………………page 9
Section 4
Five Types of Tests…………………………………………page 9-10
Test of Controls……………………………………………..page 10
Substantive Tests……………………………………………page 10
Analytical Procedures……………………………………….page 10
Test of Details of Balances………………………………….page 10-11
Conclusion…………………………………………………. page 11
Reference Page……………………………………………...page 12
Section 1
Introduction
General Electric has very aggressive competition through changing technology where they continue to do researching and development. They are affected by world economies and the instability in commodity prices, price of oil, and foreign currency volatility. Some factors that may affect General Electric’s business is the quality and efficiency in the product development department, research and development expenditures, and the regulatory standards of their products (United States Securities and Exchange Commission, 2016). Do to the size and global market of General Electric, it could take them at least three months to do a proper audit. One month for planning, one month for fieldwork, and one month for the audit report.
Initial Risk Assessment
General Electric is a global company operating in over eight different segments including: power, renewable energy, oil & gas, aviation, healthcare, transportation, energy/connections & lighting, and capital. With this diverse business platform comes numerous risks, consisting of both firm-specific and macro-level risks. As GE CEO, Jeffrey Immelt, points out, the most notable risk factors lie within product quality, cybersecurity, liquidity, global compliance and business integrations (SEC, 2016).
Product quality is the risk of product failure, safety and environmental issues, and risks stemming from operations surrounding the product’s development. It is crucial when conducting an audit of a product-focused firm to recognize all products and service lines, as well as the inherent risks that lie within the value chain of the products and services. Third-party vendors generally present additional risk on the front and back end of a product. It is pivotal to understand the value chain in its entirety in order to know when and where to gather audit evidence. It is also essential to know when there is new product introduction and how that affects the various revenue and expense items generated from th.
Case 48 Sun Microsystems Done by Nour Abdulaziz Maryam .docxannandleola
Case 48: Sun Microsystems
Done by: Nour Abdulaziz
Maryam Barifah
Shrouq Al-Jaadi
Balqees Mekhalfi
Yara El-Feki
Introduction
•In 2009, Oracle was planning to acquire Sun Microsystems.
•This acquisition would allow Oracle;
•to further diversify their brand, customers and acquire various new platforms that would be added to their portfolio such as MySQL, Solaris and Java.
•Oracle originally placed an offer of $9.50 per share price which is considerably higher than Sun Microsystem’s price that is $6.69.
•This will cut the production costs and make the company more efficient throughout all the value chain.
•Oracle aimed to capitalize on Sun Microsystem’s decline by getting particular assets or the whole company at the deflated price.
Is Sun Microsystems a good strategic fit for Oracle? Should Oracle acquire Sun Microsystems?
- as it will allow them to achieve their vision of becoming the Apple of the software industry.
- it will allow the company to deliver high-quality customer products by combining both hardware and software components, hence reducing the consumer setup process.
Continue
It will provide Oracle with the needed expansion.
-This acquisition fits Oracle’s overall strategy which is to improve through acquiring and effectively integrating other companies
Worth of Sun Microsystems and Valuation Approaches
To know how much Sun Microsystems worth, we must find the Stand Alone Value of the company.
The Stand Alone value represents the present value of Sun Microsystem individually before factoring the synergy that would be created when Oracle acquires Sun.
Another method is the value of Sun Microsystem with synergies, which after being acquired by Oracle, must be found. This is done to see whether or not the acquisition was a proper strategic decision or not
Another method of valuing the Sun Microsystem is through the comparative company analysis (CCA). That is done through the thorough assessment of rival and peer businesses of similar size and industry.
Finally, the acquisition price, which is the price that is paid to the target when it is first acquired, is also used as a separate method of valuation. The value of the acquisition price ranges between the values of the stand-alone and the synergies.
USING THE DCF
To be able to find the values of both, the Stand Alone and the synergies, we have decided the best way to do so is by calculating the discounted cash flow (DCF) by using the multiples and the perpetuity growth methods and finding the average of both.
DCF Using Multiples MethodDCF Using Perpetuity Growth MethodIt does not consider long-term growth rate or the economics of business.This method seems inaccurate as the company assumes a certain growth rate will remains the same 2014 onwards (forever) which is unrealistic.It is considered a challenging method to use as it is very difficult to identify truly comparable companies.
USING THE WACC
The weig.
This document summarizes a report on value creation indicators for shareholders and stakeholders. It presents a stochastic model that shows shareholders' value creation and stakeholders' value creation are not contradictory, as optimal investment in both relational and non-relational capital is positive when returns exceed costs. The document also discusses performance valuation using indicators like NOPAT, EVA, and risk-adjusted measures. It emphasizes the importance of dynamic capital allocation and governance for long-term total value creation.
Unit VII Essay Write an essay discussing how an obstruction co.docxmarilucorr
Unit VII Essay
Write an essay discussing how an obstruction could influence the operation of a fire protection system in a large, indoor self-storage facility. Discuss the differences between expected outcomes if the notification system worked properly and if the notification system failed and a fire did occur.
Your response must be at least three pages in length, double spaced, and 12-point Times New Roman font. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying APA citations.
Live Case One
LIVE CASE ONE
Covanta Holding Corp (CVA)
Anish Puri
Bryant University
Introduction
Covanta Holding Corporation is an American multinational firm headquartered in Morristown, New Jersey and operates in the renewable energy industry. The firm was incorporated in 1992 in Delaware. Covanta’s main business is to convert waste into energy through its subsidiaries. The company operates in North America and also holds interests in energy-from-waste facilities in Italy and Ireland. In addition, the company owns infrastructure business in China. Its corporate culture is focused on the bottom line of sustainability which involves people, planet, and prosperity. The objective of the study is to analyze the financial and nonfinancial information and evaluate the performance of the business management.A. Financial Information about Covanta Holding Corp
The mission of the company is to provide sustainable waste management and energy solutions to its clients. This is achieved by offering waste management services and operating the infrastructure required to generate energy. Energy-from-waste (EfW) facilities generate power through the combustion of non-hazardous waste. The combustion process converts the waste into inert ash and at the same time extract both ferrous and nonferrous metals for recycling.
Covanta trades at NYSE under the ticker symbol CVA, the shares are currently trading at $15.20 (Reuters, 2018). In addition, the common stock has a par value of $0.10 per share. The company’s income statement analysis is as shown in Table 1 below;
2016 (millions)
Percentage change
2015 (millions)
Percentage change
2014 (millions)
Operating revenue
$1,699
3.28%
$1,645
-2.20%
$1,682
Operating expense
$1,590
3.52%
$1,536
2.01%
$1,528
Operating income
$109
0.00%
$109
-29.22%
$154
Net income/loss
-$4
-105.88%
$68
3500.00%
-$2
Table 1- Income statement analysis Source (“Securities Exchange Commission,” 2017)
According to the income statement, the company’s operating revenue reflects a positive trend from 2014 to 2016. Even though the firm’s operating revenue decline in 2015 by -2.20% it recovered in 2016 by posting a 3.38% increase in the operating revenue. However, the operating expense increased at a rate of 3.52% in 2016 than the operating income which increased by 3.38% during the same period. On the other hand, the operating income declined by -29.22% in 2015 and remained ...
This document discusses different methods for estimating the cost of equity for Aero Pieces, an aircraft parts company, by incorporating industry risk. It compares using the Capital Asset Pricing Model with an industry risk premium, versus the traditional build-up method which factors industry risk into the company-specific risk premium. Applying each method using equity risk premium data from different sources, the estimated cost of equity for Aero Pieces ranges from 12.40% to 15.80%.
The document summarizes key changes in the Basel Committee's revised market risk framework, known as Fundamental Review of the Trading Book (FRTB). It introduces more complex capital calculations under the internal models approach, with requirements for multiple scenario analyses and risk factor combinations that significantly increase processing needs. It also requires clearer position classification and metadata for regulatory capital calculations. Banks will need enhanced data management and risk aggregation capabilities to integrate information across business units. The substantial technology impacts suggest a long-term, flexible implementation approach rather than short-term minimum compliance.
Week 3 General Electric ReportChad Uhler, Chaka Birde.docxcockekeshia
Week 3: General Electric Report
Chad Uhler, Chaka Birdette, Sharitza Bailey, Amy Piper
ACC/491
June 26, 2017
Alisa Dumond
1
12
Week 3 Scenario Assignments
Table of Contents
Section 1
Introduction…………………………………………………page 3
Initial Risk assessment……………………………………...page 3-5
Section 2
Analytical Procedures………………………………………page 5-6
Analysis of Ratios…………………………………………..page 6-7
Section 3
Materiality………………………………………………….page 7-8
Misstatement……………………………………………….page 8
Audit Risks…………………………………………………page 8
Audit Risk Model…………………………………………..page 8
Inherent Risks………………………………………………page 9
Relationship of Risk to Audit Evidence……………………page 9
Section 4
Five Types of Tests…………………………………………page 9-10
Test of Controls……………………………………………..page 10
Substantive Tests……………………………………………page 10
Analytical Procedures……………………………………….page 10
Test of Details of Balances………………………………….page 10-11
Conclusion…………………………………………………. page 11
Reference Page……………………………………………...page 12
Section 1
Introduction
General Electric has very aggressive competition through changing technology where they continue to do researching and development. They are affected by world economies and the instability in commodity prices, price of oil, and foreign currency volatility. Some factors that may affect General Electric’s business is the quality and efficiency in the product development department, research and development expenditures, and the regulatory standards of their products (United States Securities and Exchange Commission, 2016). Do to the size and global market of General Electric, it could take them at least three months to do a proper audit. One month for planning, one month for fieldwork, and one month for the audit report.
Initial Risk Assessment
General Electric is a global company operating in over eight different segments including: power, renewable energy, oil & gas, aviation, healthcare, transportation, energy/connections & lighting, and capital. With this diverse business platform comes numerous risks, consisting of both firm-specific and macro-level risks. As GE CEO, Jeffrey Immelt, points out, the most notable risk factors lie within product quality, cybersecurity, liquidity, global compliance and business integrations (SEC, 2016).
Product quality is the risk of product failure, safety and environmental issues, and risks stemming from operations surrounding the product’s development. It is crucial when conducting an audit of a product-focused firm to recognize all products and service lines, as well as the inherent risks that lie within the value chain of the products and services. Third-party vendors generally present additional risk on the front and back end of a product. It is pivotal to understand the value chain in its entirety in order to know when and where to gather audit evidence. It is also essential to know when there is new product introduction and how that affects the various revenue and expense items generated from th.
Case 48 Sun Microsystems Done by Nour Abdulaziz Maryam .docxannandleola
Case 48: Sun Microsystems
Done by: Nour Abdulaziz
Maryam Barifah
Shrouq Al-Jaadi
Balqees Mekhalfi
Yara El-Feki
Introduction
•In 2009, Oracle was planning to acquire Sun Microsystems.
•This acquisition would allow Oracle;
•to further diversify their brand, customers and acquire various new platforms that would be added to their portfolio such as MySQL, Solaris and Java.
•Oracle originally placed an offer of $9.50 per share price which is considerably higher than Sun Microsystem’s price that is $6.69.
•This will cut the production costs and make the company more efficient throughout all the value chain.
•Oracle aimed to capitalize on Sun Microsystem’s decline by getting particular assets or the whole company at the deflated price.
Is Sun Microsystems a good strategic fit for Oracle? Should Oracle acquire Sun Microsystems?
- as it will allow them to achieve their vision of becoming the Apple of the software industry.
- it will allow the company to deliver high-quality customer products by combining both hardware and software components, hence reducing the consumer setup process.
Continue
It will provide Oracle with the needed expansion.
-This acquisition fits Oracle’s overall strategy which is to improve through acquiring and effectively integrating other companies
Worth of Sun Microsystems and Valuation Approaches
To know how much Sun Microsystems worth, we must find the Stand Alone Value of the company.
The Stand Alone value represents the present value of Sun Microsystem individually before factoring the synergy that would be created when Oracle acquires Sun.
Another method is the value of Sun Microsystem with synergies, which after being acquired by Oracle, must be found. This is done to see whether or not the acquisition was a proper strategic decision or not
Another method of valuing the Sun Microsystem is through the comparative company analysis (CCA). That is done through the thorough assessment of rival and peer businesses of similar size and industry.
Finally, the acquisition price, which is the price that is paid to the target when it is first acquired, is also used as a separate method of valuation. The value of the acquisition price ranges between the values of the stand-alone and the synergies.
USING THE DCF
To be able to find the values of both, the Stand Alone and the synergies, we have decided the best way to do so is by calculating the discounted cash flow (DCF) by using the multiples and the perpetuity growth methods and finding the average of both.
DCF Using Multiples MethodDCF Using Perpetuity Growth MethodIt does not consider long-term growth rate or the economics of business.This method seems inaccurate as the company assumes a certain growth rate will remains the same 2014 onwards (forever) which is unrealistic.It is considered a challenging method to use as it is very difficult to identify truly comparable companies.
USING THE WACC
The weig.
This document summarizes a report on value creation indicators for shareholders and stakeholders. It presents a stochastic model that shows shareholders' value creation and stakeholders' value creation are not contradictory, as optimal investment in both relational and non-relational capital is positive when returns exceed costs. The document also discusses performance valuation using indicators like NOPAT, EVA, and risk-adjusted measures. It emphasizes the importance of dynamic capital allocation and governance for long-term total value creation.
Unit VII Essay Write an essay discussing how an obstruction co.docxmarilucorr
Unit VII Essay
Write an essay discussing how an obstruction could influence the operation of a fire protection system in a large, indoor self-storage facility. Discuss the differences between expected outcomes if the notification system worked properly and if the notification system failed and a fire did occur.
Your response must be at least three pages in length, double spaced, and 12-point Times New Roman font. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying APA citations.
Live Case One
LIVE CASE ONE
Covanta Holding Corp (CVA)
Anish Puri
Bryant University
Introduction
Covanta Holding Corporation is an American multinational firm headquartered in Morristown, New Jersey and operates in the renewable energy industry. The firm was incorporated in 1992 in Delaware. Covanta’s main business is to convert waste into energy through its subsidiaries. The company operates in North America and also holds interests in energy-from-waste facilities in Italy and Ireland. In addition, the company owns infrastructure business in China. Its corporate culture is focused on the bottom line of sustainability which involves people, planet, and prosperity. The objective of the study is to analyze the financial and nonfinancial information and evaluate the performance of the business management.A. Financial Information about Covanta Holding Corp
The mission of the company is to provide sustainable waste management and energy solutions to its clients. This is achieved by offering waste management services and operating the infrastructure required to generate energy. Energy-from-waste (EfW) facilities generate power through the combustion of non-hazardous waste. The combustion process converts the waste into inert ash and at the same time extract both ferrous and nonferrous metals for recycling.
Covanta trades at NYSE under the ticker symbol CVA, the shares are currently trading at $15.20 (Reuters, 2018). In addition, the common stock has a par value of $0.10 per share. The company’s income statement analysis is as shown in Table 1 below;
2016 (millions)
Percentage change
2015 (millions)
Percentage change
2014 (millions)
Operating revenue
$1,699
3.28%
$1,645
-2.20%
$1,682
Operating expense
$1,590
3.52%
$1,536
2.01%
$1,528
Operating income
$109
0.00%
$109
-29.22%
$154
Net income/loss
-$4
-105.88%
$68
3500.00%
-$2
Table 1- Income statement analysis Source (“Securities Exchange Commission,” 2017)
According to the income statement, the company’s operating revenue reflects a positive trend from 2014 to 2016. Even though the firm’s operating revenue decline in 2015 by -2.20% it recovered in 2016 by posting a 3.38% increase in the operating revenue. However, the operating expense increased at a rate of 3.52% in 2016 than the operating income which increased by 3.38% during the same period. On the other hand, the operating income declined by -29.22% in 2015 and remained ...
Finance Project: Beta Values of StocksAashay Verma
This was a project in our FIN101: Introduction to Finance course with Prof. Ajit Mishra. We calculated the risk and return on 5 stocks listed on the BSE SENSEX and analysed them.
This document discusses the cost of capital, discount rate, and required return for capital budgeting. It covers:
1) How the required return on a project should be at least as great as the expected return on comparable financial assets of the same risk.
2) How the cost of capital depends on the risk of the investment, and how this cost is used as the discount rate.
3) How to estimate the cost of equity using the dividend growth model and CAPM approaches, as well as the costs of debt and preferred stock.
4) How the weighted average cost of capital incorporates the individual costs based on the firm's capital structure.
Crimson Publishers-The Risk Level of Viet Nam Listed Medical and Human Resou...CrimsonPublishers-SBB
The Risk Level of Viet Nam Listed Medical and Human
Resource Company Groups After the Global Crisis
2009-2011 by Dinh Tran Ngoc Huy in Significances of Bioengineering & Biosciences
An Analysis of Efficiency Performance of Private life Insurancepaperpublications3
Abstract:This paper deals with the analysis of the Efficiency of private life insurance industry since the liberlisation process of insurance sector in the country. Keeping in view the limitations of ratio analysis techniques, the methodology used to judge the efficiency of private life insurance companies is Data Envelopment Analysis (DEA). The result of the DEA analysis is used to assess the technical efficiency of individual firms with respect to the best practice or benchmark firms. It further allows the classification of the technical efficiency into pure technical and scale efficiency. The present study has used the Farrel model which was further developed by Charnes, Cooper, and Rhodes (1978). Data Envelopment Analysis (DEA) is a non-parametric linear programming tool used to study the efficiency of the economic units (life insurers) through the construction of the economic frontier. The study takes into account ten private life insurance companies which commenced their business in the country in the year 2001-2002 .The study covers a period of 13 years from 2001-02 till 2013-14.It is found that the technical efficiency scores of the firms measured under pure technical efficiency and scale efficiency scores of the firms are rising over the years. Of the ten private companies taken for study, SBI life shows that it is operating at a full scale and technically highly efficient firm in par with public sector monopolist Life Insurance Corporation of India.
The Cost of Capital, Corporation Finance and The Theory of InvestmentRaju Basnet Chhetri
This article develops a theory of capital structure and its implications. It proposes three main propositions:
1) The market value of a firm is independent of its capital structure and depends only on expected returns.
2) The expected yield of common stock increases linearly with leverage.
3) The cutoff point for a firm's investments, known as the cost of capital, depends only on expected returns and is unaffected by capital structure.
The authors provide preliminary empirical evidence from utilities and oil companies that supports the first two propositions. They also discuss how the propositions can inform corporate financial planning and investment decisions. The theory contributes a new framework for understanding how capital structure relates to firm valuation and investment.
RaySearch Laboratories is a medical technology company focused on developing advanced software for radiation therapy cancer treatment. A financial analysis of RaySearch found the company to be highly profitable, with an EBIT margin of 27.8% in 2014 close to its target of exceeding 30%. RaySearch's net profit margin of 27.6% significantly exceeds industry averages in both Europe and the US, demonstrating its strong relative profitability. While overcoming a 2013 lawsuit, RaySearch has seen nearly doubled share prices over the past year as sales of its flagship RayStation product continue to increase. The company's strong financial position and profitable growth establish it as a promising investment opportunity.
Using binary logistic regression, the author analyzes factors that influence the probability of company bankruptcy. The regression uses data on 6820 companies to predict bankruptcy based on return on assets, operating profit rate, total asset turnover, and return on equity. The model accurately predicts bankruptcy status for 96.8% of companies. Return on assets, operating profit rate, and total asset turnover are statistically significant predictors of bankruptcy. The author concludes that bankruptcy prediction is important because it can impact connected industries, and financial performance factors like profitability and asset use influence bankruptcy risk.
The dividend discount model (DDM) is commonly used to value stocks. It calculates a stock's intrinsic value based on expected future dividends, discounted back to the present. The DDM has advantages like simplicity and relying on theoretical foundations, but it also has disadvantages like not accounting for intangible assets and being dependent on assumptions about stable dividend growth rates. Whether the DDM or multiples approach is more accurate depends on the specific company and analysts must consider various valuation techniques and compare to industry averages to determine if a stock is undervalued, overvalued, or fairly valued.
This is the fifth presentation for the University of New England Graduate School of Business course GSB711 Managerial Finance, offered by Dr Subba Reddy Yarram. This presentation examines risk, return and the Capital Asset Pricing Model (CAPM).
Capital arranging suggests the system grasped by a business or relTawnaDelatorrejs
The document discusses capital budgeting and how it is used by businesses and organizations. Capital budgeting involves assessing cash inflows and outflows to determine if potential benefits from projects will meet return targets. It allows organizations to only pursue projects that maximize shareholder returns, as most have limited cash. There are different capital budgeting methods, such as throughput analysis which considers the entire organization as a single process and measures throughput as materials passing through. Capital budgeting is used to evaluate large potential projects and determine if they are viable and warrant financial investment.
Capital arranging suggests the system grasped by a business or relhoney690131
Through capital budgeting, companies evaluate potential projects and investments by assessing cash inflows and outflows to determine if the potential benefits will meet return targets. There are different capital budgeting methods, such as throughput analysis which considers the entire company as a single process and measures materials passing through. Capital budgeting helps companies pursue only projects that maximize shareholder returns and allocate limited capital to divisions providing the greatest benefits. Financial analysis is used by companies to evaluate whether investments are viable and worth the financial commitment. It can be conducted internally or externally and includes fundamental analysis of a security's intrinsic value and specific analysis of changes in value patterns.
This statistical analysis report examines IGI's position in Pakistan's insurance market and analyzes profitability and risk segmentation in the fire industry. Section 1 analyzes the top insurance companies based on underwriting profits and gross premiums from 2005-2013. IGI shows inconsistent underwriting growth trends compared to other mid-sized companies that generally see premium growth boost underwriting. Section 2 will segment fire industries based on profitability ratios to identify low-risk industries for IGI to target. The report aims to link the sections to improve IGI's underwriting profits and profitability through its fire premium portfolio. Regression analysis is conducted to determine the impact of various factors like premium, claims, and commissions on underwriting profits for different companies.
The document discusses the process of selecting a stock for investment from a particular sector. It begins by discussing how to identify a sector that investors are interested in based on its market composition and trading levels. It then examines the money flow status of companies in the selected sector. Next, it compares the sector index of the selected sector to other sectors to identify better investment opportunities. It outlines how a data matrix can be used to filter companies based on financial metrics. It also discusses how the company page and fundamental/news charts of a selected company provide important investment information. Technical charts are analyzed to time the market and select a stock showing upward trends.
Does the capital assets pricing model (capm) predicts stock market returns in...Alexander Decker
This document examines whether the Capital Asset Pricing Model (CAPM) can predict stock returns in Ghana using data from selected stocks on the Ghana Stock Exchange from 2006-2010. The results found no statistically significant relationship between actual and predicted returns, indicating CAPM with constant beta cannot explain differences in returns. It was also found that some stocks were on average undervalued while one was overvalued over the period studied. The conclusion is that the standard CAPM model cannot statistically explain the observed differences in actual and estimated returns of the selected Ghanaian stocks.
The document discusses LEGO Group's outsourcing journey with Flextronics and the key learnings. It summarizes that LEGO outsourced production to Flextronics to cut costs but the partnership ended sooner than expected due to organizational differences between the companies. LEGO learned that their processes were more specialized than realized and that in-house production was still more effective. While the relationship did not meet expectations, LEGO gained insights into improving documentation, standardization, and managing a global production network. The document provides recommendations for choosing the right partner and emphasizes communication, documentation, and aligning business models for a successful outsourcing partnership.
Piaggio Group is a large international automotive company that produces scooters, motorcycles, and commercial vehicles. It has a dominant corporate strategy focused on its two-wheel vehicle business, which accounts for 70% of revenues. The company has expanded globally through production facilities worldwide. Our analysis recommends Piaggio acquire Scoo.mee, an innovative scooter sharing startup, to improve its corporate strategy. This would allow Piaggio to enter the fast-growing sharing economy sector and increase revenues and return on invested capital through reduced partnership costs and higher earnings from additional business. Key financial metrics for Piaggio have increased in recent years, but return on invested capital is close to the cost of capital, indicating need for
Presentation on financial options, option valuation, and payout policyEdoardo Falchetti
This document discusses financial options and payout policy. It includes:
1) An agenda that covers option valuation, payout policy, and chapters from textbooks on financial markets, options, and binomial option pricing models.
2) A data case that analyzes the payout policy of a company with $5.8 billion in cash, including calculations for dividends per share and share repurchases.
3) Explanations and calculations of the payout the client would receive under different dividend and repurchase scenarios over various time periods.
Presentation investor behavior and capital market efficiencyEdoardo Falchetti
This document summarizes key concepts from chapters 10-13 of a financial markets textbook. It includes data and calculations on portfolio returns, volatility, and the effects of changing portfolio weights. It also discusses estimating the equity cost of capital using the CAPM model and identifying an individual stock's alpha. The document notes how investor behavior can affect asset prices and market efficiency. It poses several questions about using market indexes as proxies and estimating the market risk premium. Overall, the summary focuses on portfolio theory, the CAPM model, and market efficiency.
1. The document analyzes whether real estate is a good diversifier in a mixed asset portfolio using modern portfolio theory and mean-variance analysis.
2. It finds that direct real estate has the highest Sharpe ratio and slightly negative correlations with other asset classes, suggesting it can improve portfolio efficiency.
3. However, direct real estate is also costlier and less liquid than other assets, so an average individual investor may prefer more feasible alternatives than direct real estate holdings.
- Direct real estate outperformed other asset classes on a risk-adjusted basis based on summary statistics of returns from 1987-1999 in the UK. Bonds also outperformed equities during this period.
- Direct real estate had a negative correlation with other asset classes, providing diversification benefits, while indirect real estate was strongly positively correlated with equities.
- During an economic downturn from 1993-1995 in the UK, direct real estate increased while other asset classes declined, demonstrating its diversification properties.
- A mean variance analysis found that an optimal portfolio allocated 57% to direct real estate, 41% to bonds, 2% to equities, and 0% to indirect real estate, achieving the highest risk
Finance Project: Beta Values of StocksAashay Verma
This was a project in our FIN101: Introduction to Finance course with Prof. Ajit Mishra. We calculated the risk and return on 5 stocks listed on the BSE SENSEX and analysed them.
This document discusses the cost of capital, discount rate, and required return for capital budgeting. It covers:
1) How the required return on a project should be at least as great as the expected return on comparable financial assets of the same risk.
2) How the cost of capital depends on the risk of the investment, and how this cost is used as the discount rate.
3) How to estimate the cost of equity using the dividend growth model and CAPM approaches, as well as the costs of debt and preferred stock.
4) How the weighted average cost of capital incorporates the individual costs based on the firm's capital structure.
Crimson Publishers-The Risk Level of Viet Nam Listed Medical and Human Resou...CrimsonPublishers-SBB
The Risk Level of Viet Nam Listed Medical and Human
Resource Company Groups After the Global Crisis
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An Analysis of Efficiency Performance of Private life Insurancepaperpublications3
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M&A diversification potential project
1. Assignment 2
Tutor: Andrea Peric
Tutorial Number: 8
Group: 1
Edoardo Falchetti, Max Berben, Tim Schrader
Introduction
AirTech is a company active in the technological industry. After having reached a prominent level
of market capitalization, the firm is now aiming to expand, both to deploy positive NPV
opportunities in the market and to reduce the risks of entering financial distress. Following an
accurate scrutiny of the whole industry, AirTech has identified two possible alternatives among
several potential targets, narrowing down the search to SolarTech and BioTech.
Both the acquisition targets have the potential to revolutionize the location decision of data centers,
using different approaches: SolarTech aims to produce innovations able to enhance the efficiency of
solar panels, whereas BioTech focuses on building smaller biomass plants.
In this report, both investment opportunities will be thoroughly analysed. In the next section, the data
set will be examined, and an overview of the descriptive statistics will be provided. Next, the
forecasted cash flows for the two potential acquisition targets will be broken down, through a
comparison between the two companies’ NPVs. Afterwards, the diversification potential will be
assessed, by counterposing the statistics following an acquisition of either SolarTech or BioTech. An
interesting point of view will be analysed in the penultimate section, in which an investor is allowed
to choose the weights in his portfolio freely, with the goal of maximizing the portfolio Sharpe ratio.
Lastly, some empirical evidences on whether or not diversification is always good will be presented,
in relation to both conglomerates and individual investors. In the conclusion will be reported the most
remarkable results, with a final recommendation. The aim of this paper is to provide more information
about the two alternative projects, establishing a fair price and thoroughly assessing the effects of the
acquisitions on the risk and return of the resulting portfolio.
Data set
The data set analyzed is based on a sample period of 8 years and 1 month (97 months), running
from September 2006 to October 2014. The historical data series for the three companies –
AirTech, SolarTech, and BioTech – are provided together with another historical data series which
refers to the market index for the same period. The other data provided concern the market value of
the three companies, their capital structure, and the cost of debt. In addition, information about the
cash flows for the two potential acquisition targets and their relative cash flows growth rate are
provided, together with the risk-free rate (4.30%) and the corporate tax rate of AirTech (34%)
(Appendix, Table 1).
Data Analysis
At first, the average monthly returns for the three companies and the market index were calculated,
and further annualized through compound capitalization for analysis purposes. For the sample
period analysed, SolarTech was the one with the highest annual return (78.43%); on the other hand,
BioTech represents the one with the lowest return (12.32%). AirTech’s return is slightly higher than
the market index’s return (37.22 and 34.74%, respectively).
The same analysis has been carried out for what concerns the volatility, or standard deviation. The
formula used is STDEV.S, since it refers to a sample rather than a population. From the obtained
2. results, relevant insights can be ascertained: SolarTech’s annual volatility is equal to 36.49%, and is
higher than BioTech’s one which, in turn, is almost equal to the market index’s one (29.24 and
28.54%, respectively). From the analysis of the standard deviation, it is steadily observable that
AirTech’s standard deviation is higher than its targets’ ones: This is consistent with AirTech’s goal
of acquiring one of the two targets to decrease the standard deviation of the company, by taking
advantage of the possible diversification benefits.
Then the Sharpe ratio, the risk-adjusted measure of returns, was calculated for the three companies
and the index, using a risk-free rate of 4.30%. By observing the results, the two acquisition targets
have diametrically diverse Sharpe ratio values: SolarTech has a Sharpe ratio of 2.03, which is
considerably high. On the other hand, the Sharpe ratio of BioTech is only 0.27. The Sharpe ratios
for AirTech and the market index are respectively equal to 0.76 and 1.07.
From the analysis of the returns, volatility, and Sharpe ratio we can carve out a first general
overview of the two acquisition targets: SolarTech has a very high return compared to the other
companies, and is also less volatile than AirTech itself. BioTech, instead, has lower returns
compared to the others, but is the company which has the lowest volatility.
By examining the betas, a counterintuitive evidence against the average industry values of beta can
be found: Usually, companies in high-technologies industries tend to have very high betas, since
their activity is highly dependent upon their business cycles. Nevertheless, the three companies
analysed have beta values which are even lower than 1. The beta values are 0.53, 0.71, and 0.61, for
AirTech, SolarTech, and BioTech respectively (Appendix, Table 2).
AirTech has a financial structure consisting of 30% debt and 70% equity. By acquiring BioTech,
the ratio of debt in the firm would increase, being this value equal to 39% for BioTech. If the main
goal of the firm is to avoid incurring in a situation of financial distress, acquiring SolarTech would
be a more viable solution, and the financial distress would be hence diminished (D=25%)
(Appendix, Table 1).
Without considering any tax benefits, AirTech’s WACC is equal to 20.39%. Among the three
companies, SolarTech is the one with the highest WACC (26.04%), which means that it is costlier
for the company to finance its business operations. This could be explained by the fact that it has a
lower market value than both AirTech and BioTech (WACC=22.88%), and is hence smaller if
compared to the others. In general, smaller firms face higher costs to finance their operations
especially in their initial stages, because they are considered to be riskier (Appendix, Table 3).
Cash Flows estimation
After having analysed the descriptive statistics for the three companies and the market index, the
next step of our analysis is the cash flows estimation for the two potential acquisition targets,
SolarTech and BioTech.
The data also included the initial cash flows (year 0) for both companies, which are equal to
900,000 for SolarTech and 1,100,000 for BioTech. To forecast the future cash flows, an expected
future growth rate has been used – 6.054 and 4.351%, for SolarTech and BioTech respectively
(Appendix, Table 1). The cash flows have been forecasted until year 10; after year 10, a terminal
value has been calculated.
Even though SolarTech has a higher future cash flows growth rate, its final NPV (5,676,248.49) is
lower than BioTech’s one (7,294,089.07), since the latter has both a higher initial cash flow and a
lower WACC, which is the rate at which the future cash flows have been discounted to year 0 to
calculate the NPV (Discounted Cash Flow method).
The cash flows valuation therefore suggests that BioTech outperforms SolarTech in terms of future
cash flows, as disclosed by a higher NPV value (Appendix, Tables 4 & 5).
3. Diversification potential
To assess the diversification potential of both the acquisition targets, we add each of the two
companies separately to AirTech, as if they were another asset to add to the firm’s portfolio.
At first, the post-acquisition weights have been computed, as the ratio of a firm’s market value over
the sum of the two combined companies’ market values.
If AirTech would acquire SolarTech, the weights would respectively be 70.33 and 29.67%. On the
other hand, acquiring BioTech would result in a lower weight for AirTech, as expected for the
higher market value of BioTech respect to SolarTech’s one. The new weights would be 58.81 and
41.19%, for AirTech and BioTech respectively (Appendix, Table 6).
At first glance, in the new portfolio consisting of AirTech and SolarTech there is a considerable
improvement in the annual return (49.44, versus the 37.22% of AirTech only). By acquiring
SolarTech would lead to an enhancement also by a volatility standpoint (from the original volatility
of 43.18 to a post-acquisition value of 34.12%). Lastly, the Sharpe ratio increases from 0.76 to 1.32.
If AirTech acquired BioTech instead, the annual return would decrease to 26.96%, but the
diversification benefits would be enhanced, leading to a standard deviation of 30.20%.
The post-acquisition Sharpe ratio is almost the same as the pre-acquisition one (0.75 vs. 0.76)
(Appendix, Table 7).
Optimal Portfolio
In this section, by making use of the Excel solver tool, we were able to identify the optimal
allocation. A constraint that implies that no short sales are allowed has been used (each weight must
be ≥ 0). We suppose that an investor can choose his weights freely among the three companies. The
results for the weights are consistent with the analysis made in the previous sections: By
maximizing the Sharpe ratio (Optimal Portfolio), SolarTech is the “asset” with the highest share
(78.53%). AirTech and BioTech, instead, are assigned much lower weights: 11.72 and 9.75%,
respectively. The optimal portfolio has a return of 67.15%, a standard deviation of 30.13%, and a
Sharpe ratio of 2.03. By comparing these statistics with the post-acquisition statistics analysed in
the previous section, it is discernible to observe how the optimal portfolio is able to capture the
characteristics of both the acquisition targets: The expected return and the Sharpe ratio are higher,
as a result deriving from SolarTech’s high return – and the relatively high weight assigned to this
asset -, and the volatility is lower, due to the non-negligible weight assigned to BioTech, the
company among the three with the lowest standard deviation (Appendix, Table 8).
Among the three companies there is a low level of correlation (0.19 between AirTech and
SolarTech, 0.20 between AirTech and BioTech, and 0.04 between SolarTech and BioTech), hence
acquiring either of the two firms or both would provide diversification benefits (Appendix, Table
9).
Empirical evidences on diversification
Is diversification always good? In this last paragraph, we will discuss pros and cons of
diversification, both by an individual investor’s point of view and by a conglomerate’s one.
Conglomerates are corporations which own controlling stakes in other smaller companies, which in
turn can run both related or unrelated businesses.
By an individual investor’s standpoint, diversification represents a “free lunch” every rational
investor should benefit from. Nevertheless, empirical evidences show that most individual investors
hold less than ten stocks in their portfolios, which means that they don’t diversify enough to
eliminate the idiosyncratic risk (or firm-specific risk). A probable reason for this could be the
familiarity bias: Investors tend to invest in companies they are familiar with. In order to achieve a
4. high level of diversification within a portfolio, any investor should invest in at least 30 different
assets, as proved by empirical evidence.
From a conglomerate’s point of view, several considerations must be made upfront before opting
for a new acquisition. Indeed, there are both pros and cons that a company should heed when
deciding to acquire a new company. In general, the main advantages pursued by acquiring
companies are synergies with the potential targets – which are achieved when the value of the
combination of the two firms is greater than the sum of the two stand-alone values – and risk
reduction, realized as a result of a lower idiosyncratic risk of the combined firm. Additionally, a
more diversified firm is less likely to go bankrupt, therefore can afford a higher degree of leverage,
which in turn translates into greater tax savings. Despite this, several drawbacks may arise
following an inadequate acquisition: A company that decides to acquire another one may lose the
focus on its core business and, accordingly, the profits of the combined firm may be eroded. Plus,
handling a larger combined firm may reveal itself to be an extremely tough task for the central
management team, especially when the new companies acquired occur to be in industries in which
the acquiring firm lacks expertise.
For an individual investor who already owns a well-diversified portfolio, there is no further benefit
to be obtained from a diversification through acquisition made by a firm in his portfolio. In
addition, it is cheaper for an investor to diversify his portfolio by himself.
Among the most successful conglomerates is without any doubt Disney. Disney was able to build
its rise to the top by acquiring companies which were related to its core business, developing
synergies across its divisions. Furthermore, Disney has been able to instill the company’s culture
both to its employees and to its customers. Lastly, another remarkable point is given by the
company’s forward-looking attitude: Disney was patient enough to wait for its divisions to bear
fruit, as in the case of the theme parks.
But diversification through acquisition is not a guarantee to success: There are countless companies
which failed in diversification because they acquired companies which destroyed value instead of
creating it.
Conclusions
In this paper the two potential acquisition targets, SolarTech and BioTech, have been analysed in all
respects. From the investigation of the descriptive statistics, at first glance it is observable how
SolarTech and BioTech are completely different both in terms of returns and standard deviations:
SolarTech’s returns are more than six times higher than the ones of BioTech, which in turn can
boast a lower standard deviation. But even adjusting for the risk measure by making use of the
Sharpe ratio, there is a substantial difference between the companies: SolarTech’s Sharpe ratio is
more than 9 times the one of BioTech.
From the analysis of the cash flows, the structural differences between the two companies are
further emphasized: SolarTech has a higher growth rate, but given the higher cost of capital and the
lower initial cash flow, its final NPV is rather low if compared to BioTech’s one. For these reasons,
we can state that SolarTech’s acquisition could represent a longer-term investment respect to
BioTech.
By assessing the diversification potential of both acquisition targets, SolarTech represents the
optimal choice, with an improvement in both the return and the volatility, as well as the Sharpe
ratio. Acquiring BioTech, instead, would only lead to an enhancement in the risk component, since
the combined return would be lower.
Following the results obtained in our analysis, we consider SolarTech to be the best alternative
between the two targets, and we are convinced that the benefits generated from an acquisition of
SolarTech outperform the ones coming from the potential acquisition of BioTech.
5. Appendix
Table 1: Raw Data
Assumptions All AirTech SolarTech BioTech
Market Value 13230000 5580000 9268000
Risk free rate 4.30%
Tax rate 34.00%
Cost of debt 7% 11% 9%
% Debt 30% 25% 39%
% Equity 70% 75% 61%
This year’s cash
flows 900000 1100000
CF Growth 6.054% 4.351%
Table 2: Descriptive statistics
AirTech SolarTech BioTech
Market
Index
Returns
Monthly 2.67% 4.94% 0.97% 2.52%
Annual 37.22% 78.43% 12.32% 34.74%
St. dev.
Monthly 12.47% 10.53% 8.44% 8.24%
Annual 43.18% 36.49% 29.24% 28.54%
Sharpe
ratio 0.76 2.03 0.27 1.07
Beta 0.53 0.71 0.61 1.00
Table 3: Costs of capital
AirTech SolarTech BioTech
Ru 20.39% 26.04% 22.88%
Re 26.13% 31.05% 31.76%
Pretax
Wacc 20.39% 26.04% 22.88%