Describes in detail the steps involved in the calculation of Internal Rate of Return. Useful to students of Under graduate, post graduate and professional course students pursuing course in finance
Risk and Return: Portfolio Theory and Assets Pricing ModelsPANKAJ PANDEY
Discuss the concepts of portfolio risk and return.
Determine the relationship between risk and return of portfolios.
Highlight the difference between systematic and unsystematic risks.
Examine the logic of portfolio theory .
Show the use of capital asset pricing model (CAPM) in the valuation of securities.
Explain the features and modus operandi of the arbitrage pricing theory (APT).
Describes in detail the steps involved in the calculation of Internal Rate of Return. Useful to students of Under graduate, post graduate and professional course students pursuing course in finance
Risk and Return: Portfolio Theory and Assets Pricing ModelsPANKAJ PANDEY
Discuss the concepts of portfolio risk and return.
Determine the relationship between risk and return of portfolios.
Highlight the difference between systematic and unsystematic risks.
Examine the logic of portfolio theory .
Show the use of capital asset pricing model (CAPM) in the valuation of securities.
Explain the features and modus operandi of the arbitrage pricing theory (APT).
Capital Market Line graphically represents all portfolios with an optimal combination of risk and return.
https://efinancemanagement.com/investment-decisions/capital-market-line
Weak Form of Efficient Market Hypothesis – Evidence from PakistanMuhammadFaizanAfridi
presentation on Weak Form of Efficient Market Hypothesis – Evidence from Pakistan presented by Muhammad Faizan Afridi & Sahibzada Muhammad Junaid.
Institute of Management Sciences
MBA(1.5)
This presentation provides and overview of the state of global financial markets as of October 2020 with a focus on the developments following the COVID-19 crisis and an assessment of market dynamics and downside risks
Explain the general concept of opportunity cost of capital.
Distinguish between the project cost of capital and the firm’s cost of capital.
Learn about the methods of calculating component cost of capital and the weighted average cost of capital.
Understand the concept and calculation of the marginal cost of capital.
Recognise the need for calculating cost of capital for divisions.
Understand the methodology of determining the divisional beta and divisional cost of capital.
Illustrate the cost of capital calculation for a real company.
Managerial Finance. "Risk and Return". Types of risk. Required return. Correlation. Diversification. Beta coefficient. Risk of a portfolio. Capital Asset Pricing Model. Security Market Line.
Case Notes on MW Petroleum Corporation (A)Why Should We Care A.docxwendolynhalbert
Case Notes on MW Petroleum Corporation (A)
Why Should We Care About Real Options?
Ignoring real options in a project often leads to an underestimation of the true project value. Because real options are not explicitly linked to cash flows, they may seem difficult to identify. Here are some typical examples of real options.
· The option to expand an existing investment project.
· Research and development (R&D) is an example of a growth option.
· The option to delay an investment project.
· The option to abandon a project that has already been undertaken.
From the above examples, we find that real options reflect the flexibility inherent in any capital investment process, which is often ignored by the DCF analysis because flexibility is hard to quantify in terms of cash flows. Fortunately, the breakthrough in option pricing theory provides us with the tools to find the value of these real options.
Types of Reserves
MW Petroleum’s estimated reserves can be classified into four major categories:
· proved developed reserves
· proved undeveloped reserves
· probable reserves
· possible reserves
Exhibits 3 through 6 tell us the production and cash flow projections for each of the four types of reserves.
Risk-adjusted Discount Rate (RADR)
For valuation purposes, we need an estimate of MW's WACC to discount cash flows. Unfortunately, the case does not provide many details. This presents a very realistic problem that is often faced when attempting to do analysis in the real world. For example, because MW is a subsidiary of Amoco, its (market) equity value is not available. We do not have a clear idea about the debt and equity mix of MW either. However, we do have the following information:
The average asset (unlevered) beta for Oil companies = 0.64 (footnote b of Exhibit 2).
Given this information, we can use the CAPM to calculate the cost of equity for MW.
· Cost of equity = risk-free rate + beta * market risk premium
For the risk-free rate, we can use the 1990 year-end 30-year US government bond yield given in the MW case in Exhibit 10. We choose the 30-year bond because the time horizon of the cash flows given in the case is 15 years, which is longer than 10 years. Remember, projects in this industry are long-term and, therefore, call for a longer-term Treasury yield to proxy for the risk-free rate.
To determine the market risk premium, we can rely on a report that is maintained by the Stern School of Business at New York University. This report maintains historic annual returns on stock, T-bonds, and T-bills from 1928 – Current. The report also maintains the historic market-risk premium, starting in 1960. To be consistent with our risk-free rate, we want to use the historical market-risk premium for 1990 in the following report:
· http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Next we assume that Miller Equilibrium holds. This implies:
· The WACC, which is the risk-adjusted discount rate for discoun ...
Capital Market Line graphically represents all portfolios with an optimal combination of risk and return.
https://efinancemanagement.com/investment-decisions/capital-market-line
Weak Form of Efficient Market Hypothesis – Evidence from PakistanMuhammadFaizanAfridi
presentation on Weak Form of Efficient Market Hypothesis – Evidence from Pakistan presented by Muhammad Faizan Afridi & Sahibzada Muhammad Junaid.
Institute of Management Sciences
MBA(1.5)
This presentation provides and overview of the state of global financial markets as of October 2020 with a focus on the developments following the COVID-19 crisis and an assessment of market dynamics and downside risks
Explain the general concept of opportunity cost of capital.
Distinguish between the project cost of capital and the firm’s cost of capital.
Learn about the methods of calculating component cost of capital and the weighted average cost of capital.
Understand the concept and calculation of the marginal cost of capital.
Recognise the need for calculating cost of capital for divisions.
Understand the methodology of determining the divisional beta and divisional cost of capital.
Illustrate the cost of capital calculation for a real company.
Managerial Finance. "Risk and Return". Types of risk. Required return. Correlation. Diversification. Beta coefficient. Risk of a portfolio. Capital Asset Pricing Model. Security Market Line.
Case Notes on MW Petroleum Corporation (A)Why Should We Care A.docxwendolynhalbert
Case Notes on MW Petroleum Corporation (A)
Why Should We Care About Real Options?
Ignoring real options in a project often leads to an underestimation of the true project value. Because real options are not explicitly linked to cash flows, they may seem difficult to identify. Here are some typical examples of real options.
· The option to expand an existing investment project.
· Research and development (R&D) is an example of a growth option.
· The option to delay an investment project.
· The option to abandon a project that has already been undertaken.
From the above examples, we find that real options reflect the flexibility inherent in any capital investment process, which is often ignored by the DCF analysis because flexibility is hard to quantify in terms of cash flows. Fortunately, the breakthrough in option pricing theory provides us with the tools to find the value of these real options.
Types of Reserves
MW Petroleum’s estimated reserves can be classified into four major categories:
· proved developed reserves
· proved undeveloped reserves
· probable reserves
· possible reserves
Exhibits 3 through 6 tell us the production and cash flow projections for each of the four types of reserves.
Risk-adjusted Discount Rate (RADR)
For valuation purposes, we need an estimate of MW's WACC to discount cash flows. Unfortunately, the case does not provide many details. This presents a very realistic problem that is often faced when attempting to do analysis in the real world. For example, because MW is a subsidiary of Amoco, its (market) equity value is not available. We do not have a clear idea about the debt and equity mix of MW either. However, we do have the following information:
The average asset (unlevered) beta for Oil companies = 0.64 (footnote b of Exhibit 2).
Given this information, we can use the CAPM to calculate the cost of equity for MW.
· Cost of equity = risk-free rate + beta * market risk premium
For the risk-free rate, we can use the 1990 year-end 30-year US government bond yield given in the MW case in Exhibit 10. We choose the 30-year bond because the time horizon of the cash flows given in the case is 15 years, which is longer than 10 years. Remember, projects in this industry are long-term and, therefore, call for a longer-term Treasury yield to proxy for the risk-free rate.
To determine the market risk premium, we can rely on a report that is maintained by the Stern School of Business at New York University. This report maintains historic annual returns on stock, T-bonds, and T-bills from 1928 – Current. The report also maintains the historic market-risk premium, starting in 1960. To be consistent with our risk-free rate, we want to use the historical market-risk premium for 1990 in the following report:
· http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Next we assume that Miller Equilibrium holds. This implies:
· The WACC, which is the risk-adjusted discount rate for discoun ...
1. Can you use Ameritrades information to estimate the WACC WhTatianaMajor22
1. Can you use Ameritrade's information to estimate the WACC? Why or why not?
2. How you found the comparable firm? Be specific with the process and variables used to identify the comparable firm. If you used capital structure in any of the steps, did you use market value or book value and why? Did you use the financial statement information of a particular year or the average of a sample period?
3. Why did you use equity and dividends received (rather than the original price and dividends provided) to calculate capital gains yield and dividend yield?
4. In the last 5 years, how is your company's total risk, systematic risk, and average return relative to the market average? How do you measure total risk and systematic risk?
5. Why is value-weighted average return used as the proxy for the market average?
6. In CAPM, what is the rf rate used and why did you choose that particular rate instead of the T-bill rate?
7. Why is annual market return used in the CAPM return estimate, rather than monthly return?
8. Are you able to use one of the dividend models to estimate the cost of capital? If yes, which dividend model is used and why?
9. Find annual dividend and growth rate of the annual dividends.
10. Find the D1, P0, and avg. dividend growth rate to get the cost of equity using the appropriate dividend model.
11. Next, use Market Model. State the model's equation, run the regression to get the outputs.
12. Should both intercept and beta be used in the cost of equity calculation? Why or why not? Be aware of the monthly to annual adjustment when estimating the cost of equity.
13. Is your CAPM beta similar to the beta from the market model?
14. Compare the three cost of equity estimates. Are they similar? If one of them is significantly different from the rest, it may not be reliable. Find reasons to justify why that particular model isn't reliable.
15. Of the two similar cost of equity estimates, what do you do from here?
16. To find the WACC, we also need to find the Rd and the capital structure weights. ***While the Rd of the comparable firm is given, use M&M proposition II to explain why we should use the Rd and capital structure weights of the comparable firm to calculate the WACC, rather than those of Ameritrade!
17. When it comes to estimating the capital structure weights, should you use book value or market value? Why?
Please use both the PowerPoint file and the Excel file for the case analysis and submit the Excel and Word files with your work back to me.
Video 1: https://youtu.be/S5YeCCW2Ues
After watching the first 5~ish minutes of this Video 1, you will need to construct "Sheet1" on your own as follows:
At the bottom of the Excel file, and on the right of "Exhibit 6", you should see a circle with a + sign within, click on it one time. A blank new sheet called 'Sheet1" should be created for you automatically. Note that the 5-yr sample period we need to use, as indicated in the video is Dec 31 of 1991 to Dec 31 o ...
The article re-institutes the investor faith in CAPM model and talks about how CAPM is very closely coupled to the actual investment practices at the ground level. The general criticism of CAPM model that it does not fit empirical asset pricing well cast doubt on the validity of model have been explained.
Counterparty Credit RISK | Evolution of standardised approachGRATeam
In this Article, we have made a focus on the new standard methodology (SA-CCR) for computing the EAD related to Counterparty Credit Risk portfolios. The implementation of a SA-CCR approach will become increasingly important for the Banks given the publication of the finalised Basel III reforms; in which it will require from financial institutions to compute an output floor to compare their level of RWAs between Internal and Standard approaches.
Counterparty Credit Risk | Evolution of
the standardised approach to determine the EAD of counterparties
This article focuses on Counterparty Credit Risk. The topic of this article is on the evolution and need of standardised method for the assessment of Exposure at Default of counterparties and their Capitalisation under regulatory requirements.
Senior Capstone Business 27Case 2 MotomartINTRODUCTI.docxlesleyryder69361
Senior Capstone: Business 27
Case 2: Motomart
INTRODUCTION
The Motomart case is designed to supplement your managerial/
cost accounting textbook coverage of cost behavior and variable
costing using real-world cost data and an auto-industry-
accepted cost driver. Unlike textbook problems, this data is
real. It won’t necessarily produce a clear solution when you
attempt to analyze cost behavior and apply scatter-plot,
high-low, and regression methods to separate mixed costs
into their fixed and variable components. This case also
illustrates that financial accounting decisions and methods
can have an influence on cost accounting and managerial
applications and decisions.
OBJECTIVES
When you complete this case, you’ll be able to
• Explain the importance of accrual accounting and proper
application of the matching principle for the computation
of contribution margins and break-even points
• Apply knowledge of generally accepted accounting
principles (GAAP) to a specific real-world example
• Integrate statistical analyses and scatter plots, line
graphs, and regression to determine the reliability of
financial information prepared for external use
• Use analytical review procedures to examine a firm’s
financial statements
• Apply critical-thinking skills to real-world
business circumstances
Senior Capstone: Business28
CASE BACKGROUND
This case is based on real financial data provided by a retail
automobile dealership (Motomart) seeking to relocate closer
to an existing retail dealership. You’ll examine the mixed cost
data from Motomart and apply both high-low and regression
to attempt to separate mixed costs into their fixed and variable
components for break-even and contribution margin compu-
tations. You’ll find that the data is flawed because Motomart
was a single observation in a larger database. Don’t attempt
to correct the data (e.g., remove outliers or influential outliers).
You’ll be producing a scatterplot and apply high-low and
regression methods to the extent practicable and writing a
summary report of the findings.
Motomart operates a retail automobile dealership. The
manufacturer of Motomart products, like all automobile
manufacturers, produces forecasts. It has long been an
industry practice to use variable costing-based/break-even
analyses as the foundation for these forecasts, to examine
their cost behavior as it relates to the new retail vehicles
sold (NRVS) cost driver. In preparing this financial information,
a common financial statement format and accounting proce-
dures manual is provided to each retail auto dealership.
The dealership is required to produce monthly financial
statements using the guidelines provided by this common
accounting procedures manual, and then furnish these
financial statements to the manufacturer. General Motors,
Ford, Nissan, and all other automobile manufacturers
employ similar procedures manuals.
The use of a common format facilitates the development of
composite financial s.