Week 6 Discussion: Beta and Capital Budgeting
Beta and Capital Budgeting
Part 1: Beta
Visit the following web site or other websites:
1. Search for the beta of your company (Group Project)
2. In addition, find the beta of 3 different companies within the same industry as your company (Group Project).
3. Explain to your classmates what beta means and how it can be used for managerial and/or investment decision
4. Why do you think the beta of your company (individual project) and those of the 3 companies you found are different from each other? Provide as much information as you can and be specific.
Part 2: Capital Budgeting
Before you respond to Part 2 of discussion 6 review the following information on Capital Budgeting Techniques
Capital Budgeting Decision Methods
CAPITAL BUDGETING (PRINCIPLES & TECHNIQUES)
To avoid damaging its market value, each company must use the correct discount rate to evaluate its projects. Review and discuss the following:
• Compare and contrast the internal rate of return approach to the net present value approach. Which is better? Support your answer with well-reasoned arguments and examples.
• Is the ultimate goal of most companies–maximizing the wealth of the owners for whom the firm is being operated–ethical? Why or why not?
• Why might ethical companies benefit from a lower cost of capital than less ethical companies?
1. Post your initial response no later than January 25
2. Read and respond to at least 3 of your classmates’ posts. Below are suggestions on how to respond to your classmates’ discussions:
a. Ask a probing question, substantiated with additional background information, evidence or research.
b. Share an insight from having read your colleagues’ postings, synthesizing the information to provide new perspectives.
c. Offer and support an alternative perspective using readings from the classroom or from your own research.
d. Validate an idea with your own experience and additional research.
e. Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings.
f. Expand on your colleagues’ postings by providing additional insights or contrasting perspectives based on readings and evidence.
1st student response (Sonica marepalli ) :
AstraZeneca is the company that is chosen for our group project which is a bio pharmaceutical company. The beta value of AstraZeneca is said to be 0.20, according to statistics that is given under the website of Yahoo finance. I would like to mention the beta values of three other different companies within the same industry. Such different companies include the Abbott laboratories which has a beta value of 1.11. Merck & Co contains a beta value for the five years monthly as 0.53 which is more than the beta value of AstraZeneca. The other company that I would like to mention the beta value of, is the Johnson and Johnson company which has a beta coefficient of 0.71 (“AZN 50.20 -0.25 -0.50% : AstraZeneca PLC – Yahoo Finance,” n.d.).
Beta definition and importance:
Beta coefficient is also known as the investment security of stock and is defines to be the volatility measurement of relative returns that exist to the market on a whole. It is also utilized as the risk measurement towards the integral part of the CAPM model which is defined as the model of capital asset pricing. The coefficient value of beta has its own definitions, if the beta value is exactly one then it means that it is volatile as that of the market. If the beta value is either more or less than one, then it means that it is either more or less volatile than the market (“Beta – What is Beta (β) in Finance? Guide and Examples,” n.d.).
Why beta is different for different ventures?
The reasons that determine the beta values and its differentiation between the different companies rely on certain factors on how the beta is calculated. As different companies calculate the beta value based on different years there would be difference in the beta value of different companies. The calculation of beta value of three years would be different to that of te value that is calculated for five years. The other reason is the capital structure of the enterprises that would foresee a difference in the beta values. This is the reason why the beta value of AstraZeneca is 0.20 which is less than that of the other companies namely Abbott laboratories, Merck & Co and Johnson & Johnson (Koren, n.d.).
Differences between Internal rate of return (IRR) and Net present value (NPV):
The capital expenditures utilize the concepts of both Internal rate of returns as well as the net present value in its evaluations. However, there exists some difference between the NPV and IRR. NPV deals with the stream reductions of cash flows that are expected and correlated to the present value of the project that is proposed. On the other hand, IRR helps in the rate of return percentage calculations which leads to the nullified net present value utilizing the similar cash flows. Moreover, they also differ in terms of outcome, rate of reinvestment, issues of the reduced rates and decision support issues etc. (“The difference between NPV and IRR — AccountingTools,” 2018).
Wealth maximization of shareholders:
The wealth maximization of the shareholders that is being concerned by the management of the organization is ethical for many reasons. Such reasons include the concern for the environment in which the shareholders continue to practice the goals and objectives in addition to the maximization of the wealth. The other reason is that other firms being aggressive to the stakeholders. It also involves the agents of the management to practice their own objectives such that the shareholders would not be suffered of behavioral issues (Kothari, 2018).
Why ethical companies would be benefited with less cost of capital than the less ethical companies:
The factors that contribute to the benefit of the ethical companies even with the less cost of capital are the recognition and enhanced a goodwill of the company, cost and reduced hazards, positions of stronger aggressiveness, the agents and employees with sort of protection, expanded access to the deposit as well as foreign investment with its capital and the international respect all these contribute to the benefit of the ethical companies whilst less ethical ones (Webley & More, 2007).
AZN 50.20 -0.25 -0.50% : Astrazeneca PLC – Yahoo Finance. (n.d.). Retrieved January 22, 2020, from https://finance.yahoo.com/quote/AZN?p=AZN&.tsrc=fin-srch
Beta – What is Beta (β) in Finance? Guide and Examples. (n.d.). Retrieved January 22, 2020, from https://corporatefinanceinstitute.com/resources/knowledge/valuation/what-is-beta-guide/
DeFrancesco, R. (2012). The Importance of Beta on Your Investing | MD Magazine. Retrieved January 22, 2020, from https://www.mdmag.com/physicians-money-digest/investing/the-importance-of-beta-on-your-investing
Koren, M. (n.d.). Why do different firms in same industry have very different betas? | eNotes. Retrieved January 22, 2020, from https://www.enotes.com/homework-help/why-could-two-firms-same-industry-have-very-325111
Kothari, S. P. (2018). Why Shareholder Wealth Maximization Despite Other Objectives. Retrieved January 22, 2020, from https://corpgov.law.harvard.edu/2018/05/23/why-shareholder-wealth-maximization-despite-other-objectives/
The difference between NPV and IRR — AccountingTools. (2018). Retrieved January 22, 2020, from https://www.accountingtools.com/articles/the-difference-between-npv-and-irr.html
Webley, S., & More, E. (2007). Does Business Ethics Pay? London: The Institute of Business Ethics.
2nd student response (Hyndavi mandava) :
Beta and Capital Budgeting
Part 1: As we all know that in the business process beta can be considered as the organization’s overall investment. The term beta can be considered as the measure of the volatility or systematic risk of a security or a portfolio in comparison to the market as a whole. In traditional finance, the return on a portfolio above the risk-free rate is going to be related to how much risk that will take on. When our NPV is positive with our project becomes worth undertaking by the NPV is the difference between cash inflow and cash outflows of our project (Davis, 2016).
Part 2: Capital budgeting is a tool used for maximizing a company’s future profits since most of the companies. In the capital budgeting decision involve a huge outlay of funds should be taken after assessing each and every minute detail of the project or proposal. I suppose we need to make a series of payments so the amount required to invest is calculated by NPV at a particular rate of return on investment. Moreover, if the difference is positive then we should undertake the project or else dump it in the process of making the decisions (Evans, 2018).
Capital Budgeting Decision Methods
As we all know that the term decision making has been considered as one of the primary terms in the capital budgeting process. Here, the organization management has to take care of the budget based financial issues that can be taken in the presence of high authority. And especially complex ones such as commercial real estate that involve hard assets like buildings plus ongoing revenue streams have rental income. If we can take each individual piece of business and convert them back to NPV, then we can add them all together and value the entire business. In which it has been bringing us to the internal rate of return with the simplest way to think of IRR is what would my cost of capital need to be in order for my investment to break even (Zau Mafra, 2019).
Davis, J. P. (2016). The Group Dynamics of Interorganizational Relationships. Administrative Science Quarterly, 61(4), 621–661. https://doi.org/10.1177/0001839216649350
Evans, R. D., Deitz, G. D., Sherrell, D. L., & Rocco, R. A. (2018). Do Investors Prefer New or Existing Sponsorship Relationships: Evidence from Sponsorship Interorganizational Relationship Formation and Maintenance on Firm Stock Returns. Journal of Marketing Theory & Practice, 26(4), 329–338. https://doi.org/10.1080/10696679.2018.1487768
Zau Mafra, R., José Lasmar, D., & Chaves Vilela Júnior, D. (2019). Interorganizational Relationships in the Amazon Biotech Industry Based on Entrepreneurs’ Perceptions. RAC – Revista de Administração Contemporânea, 23(5), 672–695. https://doi.org/10.1590/1982-7849rac2019190056
452 words Permalink | ReplyRe: Week 6 Discussionby Rishit Sunil Bhatia – Monday, 20 January 2020, 2:09 PM
I think your answer to the second part of the question covers the differentiation and deep dive into IRR vs NPV but misses out on the ethical aspect of organizations trying to maximize their wealth. I’d like to throw some light on the latter aspect. In my opinion, wealth maximization by compromising on ethical behavior is not ideal. The challenge with this though is that the securities market only rewards specific type or corporate ethical behavior with regards to stock prices and does not look at the full picture. When intentional illegal corporate activity is uncovered, there is a significantly negative revision in stock prices (Poitras). Overall, there needs to be an empirical framework that considers not just wealth maximization but the overall health of the organization as well in terms of social and ethical responsibility when it comes to evaluation of stock prices. Although this is considered to some extent there is no clear balance or framework that is aligned across the market.
Poitras, Geoffrey. (1994). Shareholder wealth maximization, business ethics and social responsibility. Journal of Business Ethics. 13. 125-134. 10.1007/BF00881581.
3rd student response (Siva Parimi) :
Part I: Beta
I worked on the group project on Apple company and the Beta of Apple is 1.27.
I might want to compare the Beta of Samsung – 1.51, Beta of Sony – 1.63 and Beta of HP – 1.78. Every one of these organizations are driving organizations in the cell phones and PC industry. Macintosh additionally is a cell phone and PC producer it is reasonable to contrast the Beta of Apple and these three organizations (Yahoo Finance, 2018).
Beta is the measure used to distinguish the unpredictability of the stock. It is a measure used to acquire the non-diversifiable hazard. The unpredictability of the stock is estimated as for the general relationship with the market. The standard estimation of Beta ought to be 1.0. It implies the development in the stock will be actually like that of the development in the market. On the off chance that Beta is more noteworthy than 1 then the stock is more unstable and hazardous when contrasted with the market and the development would be indistinguishable way from that of the market. This implies the speculation returns will be more unstable and unsafe (Gitman, L. J., & Forrester Jr, J. R., 1977). Henceforth, this esteem is of incredible significance in venture choice on the grounds that the esteem more like 1 will have less instability and less hazard as with respect to the market development. Along these lines, the venture would be more secure in the event that it is done in the stocks that have a beta esteem storeroom to 1.
The Beta of Apple is 1.27 and that of Samsung, Sony and HP are 1.51, 1.63, and 1.78 separately. The Beta of Apple is more like 1, which means the unpredictability of the stock is just 1.27 occasions as that of the market. Be that as it may, the unpredictability of Samsung, Sony and HP are 1.51, 1.63 and 1.78 occasions of the market (Maximizing Shareholder Wealth, n.d). This demonstrates the arrival on HP has the most elevated responsiveness to the changing business sector returns making it more hazardous than the other three stocks. Be that as it may, Apple has the Beta of 1.27 which implies the stock is 1.27 occasions receptive to the market change and furthermore a similar way of the market moves. In any case, it has the esteem that is more like 1 and lesser than the other three organizations, which means the stock is more steady, less unstable and less unsafe when contrasted with other three organizations like Samsung, Sony and HP. Along these lines, it is judicious to put resources into supplies of Apple when contrasted with its rivals.
Part 2: Capital Budgeting
I think (NPV) Net present esteem is the distinction between the present estimation of money inflows and the present estimation of money surges over some undefined time frame. By difference, inner rate of return is a count used to assess the benefit of potential ventures. Both of these estimations are essentially utilized in capital planning. investigate demonstrates that NPV has the firm checks the future money streams of the venture and rebates them into present esteem sums utilizing a markdown rate that speaks to the undertaking’s expense of capital and its hazard (Richardson, A. J., & Welker, M., 2001). Next, the majority of the speculation’s future positive money streams are lessened into one present esteem number. you got some information about Is a definitive objective of most organizations – boosting the riches for some situation Truly, a conclusive target of any association is to expand its investor’s esteem. In spite of the fact that expansion the financial specialist regard is basic the boss should not to neglect social obligations, for instance, guaranteeing customers, paying sensible wages, guarding up sensible obtaining practices and working conditions.
I think the primary target of the administration is to boost benefits by augmenting benefits at the expense of client and limiting expense. Augmenting investor riches and amplifying benefit go as one. Both hypothetical and experimental writing underpins the attestation that supervisor should center around investor riches amplification. I thoroughly concur with moral organizations profit by a lower cost of capital than less moral organizations each organization dependably endeavor to search for benefits that way organizations will survive.
Yahoo Finance. (2018). Retrieved from https://finance.yahoo.com/
Gitman, L. J., & Forrester Jr, J. R. (1977). A survey of capital budgeting techniques used by major US firms. Financial management, 66-71.
Richardson, A. J., & Welker, M. (2001). Social disclosure, financial disclosure and the cost of equity capital. Accounting, organizations and society, 26(7-8), 597-616
Maximizing Shareholder Wealth as the Primary Goal in Financial Management (6311). (n.d.). Retrieved November 4, 2018, from https://www.wisdomjobs.com/e-university/financial-management-tutorial-289/maximizing-shareholder-wealth-as-the-primary-goal-6311.html