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CapitalBudgeting1.edited1 xBeta1.edited xscript-2021-02-08T073203.655 script-2021-02-05T141234.545
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Capital Budgeting
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Part 2
1.
Both measurements are used in capital budgeting, the process where organizations determine if a new expansion or investment opportunity is worthwhile. The capital expenditure utilizes the conception of the two net present value as well as the IRR in its assessment. Although there is some difference between the two, that is the net present value and the internal rate of return. The IRR helps in the rate of return percentage calculations, which brings about nullified net present value using the same working capital. Contrary, net present value deals with the stream reductions of working capital anticipated and correlated with the present value of the proposed project.
Also, they also differ in terms of outcome. This is because the method of NPV results in dollar values produced by the project; on the contrary, IRR cause the return percentage that the project is anticipated to develop. They also differ in decision making where the NPV technique present the result that used for decision making on investment, because it gives a dollar return (Accountingtools, 2018). On the contrary, the IRR technique does not assist to make this decision because its return percentage does not inform the person investing the amount of cash that will be generated. They also differ in terms of purpose where the NPC technique concentrates on the surpluses of the project and on the contrary IRR concentrates on project’s breakeven cashflow level.
Both also differ in terms of reinvestment rate, the supposed rate of return for the mid cash flows reinvestment in the organization’s cost of capital when the NPV is utilized, whereas it is the IRR under the technique of IRR. They also differ in terms of discount rate issues, the technique of NPV needs the utilization of a discount rate, and it may be challenging to obtain, because management may need to modify it depending on the levels of risk that are perceived. There are no such challenges with IRR method, because the rate of return is merely obtained from the cashflows that are underlying. In general, NPV is a technique that is mostly used. IRR tends to be supplied as an added information and calculated as a part of process of capital budgeting.
2. The shareholder’s wealth maximization that is being concerned by the company’s management is ethical for many rationales. Some of these reasons include the concern of the environment where the shareholders continue to practice the objectives and goals additionally to the maximization of the wealth. Also, other companies being aggressive to the stakeholders. It also involves the management agents practicing their objectives such that the shareholders will not suffer the behavioral problem.
3. The factor that takes part in the benefit of the ethical organizations even with the less capital cost is the enhanced and recognition goodwill of the organization, positions of stronger aggressiveness, cost and reduced hazards, and expanded access to the deposits. Also, a foreign investment with its capital and the international respect all contribute to the benefit of the ethical organization than less ethical companies (MICHAEL VOLKOV, 2014).
References
Accountingtools. (2018, May 9). The difference between NPV and IRR — AccountingTools. AccountingTools.
https://www.accountingtools.com/articles/the-difference-between-npv-and-irr.html
MICHAEL VOLKOV. (2014, May 15). Are ethical companies more profitable? (Part II of IV). Corruption, Crime & Compliance.
Running Head: BETA 2
BETA 2
Beta
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Beta
Wells Fargo & Company has a beta of 1.275. The beta for other companies in the financial industry like M&T bank is 1.232, JPMorgan Chase beta is 1.23, and Morgan Stanley Inc. beta is 1.59. Beta is the measure of the volatility of a stock in relation to the general market. Beta measures the responsiveness of the price of the stock to changes in the general market. The coefficient value of beta has its definition; if the value of beta is precisely one, then it means that it is volatile as that of the market (Economictimes, 2020). If the value of beta is more or less than one, then it means that it can be either less or more volatile than the market. Beta could potentially play a role in making investment decisions. With no precise relationship between beta and return over for the data set, beta seems to be the outcome of other factors and not too useful based on standalone.
Although, if an investor is assessing risk, beta seems to be more useful depending on the used period of returns (Jordan Gaglione, 2015). So, in this case, beta can be used in investment decisions to measure risks, and it is an essential part of the Capital Asset Pricing Model. Higher Beta investments tend to be more volatile and, for that reason, riskier though it provides the potential for higher returns. Low Beta investment present less risk but usually offer lower returns. Some of the investments challenge this idea by providing a lower Beta with a track record of higher returns than the benchmark. The reasons that determine the beta’s values and its differentiation between the distinct organizations depend on specific factors on how the beta is calculated.
As various organizations calculate the value of the beta based on various years, there would be a difference in the beta value of various organizations. The calculation of the beta value of 3 years would be distinct from that of the value that is calculated for five years. Another rationale is the company’s capital structure that would foresee a difference in the beta value. Companies that have distinct capital structures will have a different beta. For example, a company with less debt financing will have a lower beta than an organization with higher debt financing. The risks that an organization faces also affects its beta. This is why the beta value of JPMorgan Chase is 1.23, which is less than that of the other companies named Wells Fargo and Company, Morgan Stanley Inc, and M&T bank.
References
Economictimes. (2020). Beta. The Economic Times.
https://economictimes.indiatimes.com/definition/beta
Jordan Gaglione. (2015, May 4). Home.
https://repository.tcu.edu/bitstream/handle/116099117/10326/Jordan_Gaglione_Thesis_Rough_Draft_vF ?sequence=1&isAllowed=y
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