This website uses cookies to ensure you have the best experience. Learn more

Capital Assets Pricing Model And Discussion On How Companies Finance Their Operations

4506 words - 18 pages

Questions to be answered:1.Select a UK/US company which has issued either equity or debt/bond for the last 5 - 10 years. Identify and critically assessa.the reason(s) for, andb.the advantages and disadvantages of each of those issues,Using sources such as Nexis (available from the Birkbeck's elibrary),,, textbooks or journals/articles to support your arguments.2.Explain clearly, and provide reasoned arguments for, the share price movement after each equity or debt issuance.3.Using the Capital Assets Pricing Model, compute the beta of your selected company. Critically discuss the advantages and disadvantages of the data and methodology used.The purpose of this essay is to address three distinct questions using Diageo (DGE.L) as an example. I will discuss why and how companies raise finance and what are the advantages and disadvantages of that. I will then move to question two, and as Diageo raised finance via issuance of debt, I will try to identify how this impacted on the prices of Diageo's shares. Finally, I will discuss the theory of Capital Assets Pricing Model and use it to calculate Diageo's beta.Diageo was formed in 1997 by a merger of Guinness and GrandMet. Diageo produces and distributes some of the world most famous brands of spirits, beers and wines ( Some of the brands under Diageo's umbrella include Guinness, Johnnie Walker whiskies, Smirnoff vodka and Baileys Original Irish Cream just to mention the few. The company operates in more than 180 countries and employees over 22,000 staff ( Diageo is involved in every stage of their products' live cycle starting from production, distillation and brewing, through bottling and packaging finished beverages, up to distribution, sales and marketing ( the course of last ten years, Diageo issued number of bonds to raise capital. Due to the length constraints I will briefly mention only two of those. It is however vital to firstly look at why companies issue bonds or equity. To be able to carry on a business companies need capital. "Working capital is employed in the conduct of day to day operations while longer term finance is needed to undertake fixed capital formation, to finance expansion and to develop new processes or products" (Foley, 1991, p. 7). On a daily bases, a company will need to have sufficient money to pay its suppliers, pay rent for the properties it is using or pay employees salaries. But being able to pay for its immediate expenses is not enough in the long run. Company will also need capital to finance its expansion and future projects as "without a continuous process of regeneration firms will cease to progress and be unable to compete in a dynamic environment" (Arnold, 2008, p. 128).There are number of ways companies can get funds. One of the most popular method is using internal finance by retaining profits. A company may also look outside its borders for capital by either asking bank for a loan, or...

Find Another Essay On Capital Assets Pricing Model and Discussion on How Companies Finance their Operations

The Capital Asset Pricing Model (CAPM)

1729 words - 7 pages can be obtained: E(Ri) = Rf + [R(Rm) – Rf] σim / σm2 This is known as the Capital Asset Pricing Model (CAPM). The equation is also shown graphically below, where it is also called the security market line. The ‘BETA’ here is simply the covariance between returns on risky asset and market portfolio. BETA = β = σim / σm2 = COV (Ri, Rm) / VAR (Rm) Brealey and Myers also argued in their book Principles of Corporate Finance

Beyond The Capital Asset Pricing Model

1680 words - 7 pages The capital asset pricing model (CAPM) introduced by Jack Treynor, William Sharpe, John Lintner and Jan Mossin in 1972[2]is an important method to predict the risk and return in assets. Nowadays, the CAPM is still widely used in applications as it is a so simple and attractive tool. However it has the problems in many circumstances and we need some other extended and available models to evaluate the risk and return of assets. We know that CAPM

The Cost of Equity Capital and the Capital Asset Pricing Model

1785 words - 7 pages When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a

Dividend Growth Model, Capital Asset Pricing Model, Modern Portfolio Theory, Estimation of Untraded Stocks

1248 words - 5 pages year.2. Capital Asset Pricing ModelThe assumptions used in the Capital Asset Pricing Model (CAPM) are similar in that they assume an almost "perfect world" scenario.Initially, CAPM assumes that all investors have the same rational expectations of returns, and that these returns are in line with the best prediction for future returns as based on the available information. It also makes the assumption that the dividends are paid normally, that assets

How Accenture Assets Other Organizations to Achieve Their Aim

4976 words - 20 pages How Accenture Assets Other Organizations to Achieve Their Aim Accenture was established in 1989 mainly as a technology specialist and system join together; Accenture soon began offering a new type of business integration solution to clients, solutions that associated organisations, technologies, processes and people with their strategies. Accenture has expanded its offerings and capitalised on evolving

Multinational Companies and Their Policies

1791 words - 7 pages be providing an example of how a company was unable to manage and organize their human resource management and as a result; led to a huge impact on the performance and awareness of the company to the world. This not only affected the performance of the organization but also affected the way customers and stakeholders perceived the brand or the company. Multinational Companies and their policies Poor working conditions have been present

How companies manage their foreign exchange risk

4063 words - 16 pages TOYOTA MOTOR CORPORATIONINTRODUCTIONToyota Motor Corporation is the world's third largest automaker. It was established in Japan on 28 August 1937. Apart from its 12 plants in Japan, Toyota has 54 manufacturing companies in 27 countries, employs 246700 people and markets vehicles in more than 160 countries. Its capital as at March 2002 was 397 billion yen.Toyota is exposed to the fluctuation in foreign currency exchange as it operates mainly in

Marketing Strategy: Define marketing, discuss some of the processes used, and how companies have used marketing to their success

680 words - 3 pages define marketing, discuss some of the processes used, and how companies have used marketing to their success.Defining MarketingSimply put, marketing is about creating and keeping customers profitably. It is a process that starts with identifying customers finding out about their needs and wants, matching what your business can offer with what your customers want, and then effectively communicating and selling to the target customers while keeping

Benefits of Risk Management on Investments and Portfolio Assets

2972 words - 12 pages fake companies (are those companies who have no operations and have entered to cheat the investors) have entered the primary market in order to raise capital but the intension was to take all the money without even listing the company on the exchanges. ii. In the year 2006 IPO market was taken by surprise when shares of companies, which were going for public issues, and listing at substantial premium (Say for example the issue price is Rs 10 and

Homework 1, week 1 and 2 - Finance Management - Discussion questions

560 words - 3 pages . Describe the importance of capital allocation in financial market? In a well-functioning economy, capital flows efficiently from those who supply capital to those who demand it. Suppliers of capital: Individuals and institutions with excess funds. These groups are saving money and looking got a rate of return on their investment. Demanders or users of capital: Individuals and institutions who need to raise funds to finance their investment

Describe the utility of wireless services to its consumers, and discuss the substitute and complementary services and their impact on the pricing decision

2339 words - 9 pages structure on pricing and suggest non-price strategies as well as other sorts of strategies to help remain the firms in their optimal competitive position. At last we identify economic indicators such as gross domestic product (GDP), employment and salaries, capital investment and consumer price index (CPI). We also discuss the implication of these indicators in various aspects of economy.Product PricingWireless technology has become an important part

Similar Essays

Capital Asset Pricing Model Essay

979 words - 4 pages Finance is very essential sector in all kind of organization to be successful. It contains many financial theories which have been developed throw the years depends on special circumstances such as time, money, demand and supply. One of the important financial theories' is the capital asset pricing model which gives the investor individuals or companies the ability to be more realistic in their investments by taking market risk into

Capital Asset Pricing Model Essay

1150 words - 5 pages The Capital Asset Pricing Model Introduction The Capital Asset Pricing Model (CAPM) which builds on the portfolio theory was first stated by William Sharpe who was the Nobel Prizewinner and other theoreticians. This financial theory had a great impact on the practical of finance and business for more then forty year since it birth(Arnold, 2013, p269). After that it was developed by Lintner and other theoreticians in 1965(Black, Jeson, Scholes

The Capital Asset Pricing Model Essay

1309 words - 5 pages assets should be linear. Another important implication of the outlined equilibrium conditions is that the expected return on an asset is related to part of the asset’s risk which cannot be diversified away (i.e. systematic risk). Almost simultaneously, Lintner (1965), and Mossin (1966) came up with similar results which are later on acknowledged as the Capital Asset Pricing Model (CAPM). The CAPM is developed on the basis of following

Growth And Development Of The Capital Asset Pricing Model

2486 words - 10 pages examined the effects of financial market instability on individual behavior and how market outcomes were effected by the said behaviors (Shih et al., 2014).Black constructed a short-run dynamic, multi-period capital assets pricing model that assumed rational expectations and added a supply side to the static model of capital asset pricing (Shih et al., 2014). Menton’s intertemporal CAPM was extended by Grinols in 1984, with many consumers to incorporate