Chapter 7. Corporate Valuation and Stock Valuation
Finance â€“ Week 4 Lecture
Risk and Return
Ever wish you could invest in the stock market and earn the same kind of returns earned by big investors like Warren Buffet? Much research has been done on the market in an attempt to pinpoint a formula or magic theory that could explain the behaviors of the market and capitalize on above average returns. Several theories exist on how the market operates. One such theory is the efficient market hypothesis.
Under the efficient market hypothesis there are three proposed forms of the market: weak, semi-strong, and strong. A weak market exists when all general market information is readily available to everyone and functions on the assumption that we cannot use past performance as an indicator of future performance. The semi-strong market assumes the market to be efficient, all public information is available to all investors, and the average investor cannot beat the market rate of return. Finally, the strong market proposes that all public and private information is reflected in the price of stocks and no one could earn anything better than the market rate of return. The oversimplified difference between each type of market under this theory is that stocks may or may not change in price depending on the type of information available: market, private, or public. While information is readily available due to advances in technology, there is still the aspect of power. Information is power and it’s hard to believe that everyone would be willing to give up or go public with all information, for example, ‘insider information’.
Keep in mind, this is only a hypothesis! There are several market theories. Itâ€™s up to you to consider the theory and critically reflect on your experiences, beliefs, and what you see in the market around you to determine if you feel each theory is valid or not.
Another highly debated financial concept is the Capital Asset Pricing Model or CAPM for short. CAPM is a formula used to estimate the relationship between risk and return. This formula combines two key elements: risk and the time value of money. Included in the formula is best, the expected market return, and theÂ risk freeÂ rate of return. The great debate, however, arises when we acknowledge the many estimates upon which this formula relies. ManyÂ feelÂ that CAPM is not a reliable measure of return.
I think the key here is that the system of evaluation we have is flawed, but not completely worthless. It isn’t without its faults, but for all the criticism it receives, I haven’t yet seen a new model emerge to take its place. The general notion I hear in industry is that, while not perfect, it is the best method we have available. We must acknowledge that and use the data with a grain of salt rather than using the CAPM estimation and resulting NPV calculations as iron clad truths. It’s a great tool to use as a guide but can’t be relied upon to be accurate to a tenth of a penny. Itâ€™s also important to consider the risk involved with trying out a new method of evaluation. While we mayÂ be in need ofÂ something new, it does indeed carry some risk if we are wrong! Small projects may not take us too far out on a limb, but some investments require huge amounts of resources. These are the ones we want to be sure we have done the best job possible in assessing the possible return and of course the ones we would be hesitant to evaluate using a new, untested method.
CAPM is commonly used in the capital budgeting process which you will learn more about next week. Many firm’s use CAPM as their general rule for cost of capital. When assessing projects, the return must be greater than the firms CAPM. I found it interesting that many feel the hurdle rate is arbitrary and weeds out otherwise profitable projects. It does, indeed, weed out the lower profit projects, but in my experience, that’s the goal! We normally have a set budget to spend but also have about four times thatÂ amountÂ of profitable projects we would like to do. Regardless of the method we use to evaluate, there will likely be profitable projects that do not get chosen. We simply can’t do them all!
There are several key issues here. First, we need something to use for a rate, this provides us a good ‘guestimate’ for lack of a better figure. Second, I appreciate the notion that this works particularly well when we have a range of projects to consider (aka – the capital budgeting process). When we have only one project, however, it’s less accurate. When working with only one project could we go out on a limb and say it’s just one – can we infuse our own common sense, feel for the accuracy, and consideration of other key factors to help us evaluate how helpful the CAPM figures are and what, if any, adjustments we need to make for risk and other factors? This would be nearly impossible to do with a long line up of projects in the capital budgeting process but if we are looking at just one special project it may be possible.
As you move through the week keep your eyes and mind open. Youâ€™ll learn lots of new information, theories, and concepts, many of which are quite debatable. Keep your mind open and question the theories you read. Do they seem valid? Which theories do your beliefs and experiences support?
Remember, that this is the half-way point in the course and you do have an assignment and the midterm to complete.Â Please give yourself enough time to complete your homework and take your exam.Â If you have any questions, please contact your instructor for assistance.
Get Professional Assignment Help Cheaply
Are you busy and do not have time to handle your assignment? Are you scared that your paper will not make the grade? Do you have responsibilities that may hinder you from turning in your assignment on time? Are you tired and can barely handle your assignment? Are your grades inconsistent?
Whichever your reason is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.
Why Choose Our Academic Writing Service?
- Plagiarism free papers
- Timely delivery
- Any deadline
- Skilled, Experienced Native English Writers
- Subject-relevant academic writer
- Adherence to paper instructions
- Ability to tackle bulk assignments
- Reasonable prices
- 24/7 Customer Support
- Get superb grades consistently
Online Academic Help With Different Subjects
Students barely have time to read. We got you! Have your literature essay or book review written without having the hassle of reading the book. You can get your literature paper custom-written for you by our literature specialists.
Do you struggle with finance? No need to torture yourself if finance is not your cup of tea. You can order your finance paper from our academic writing service and get 100% original work from competent finance experts.
While psychology may be an interesting subject, you may lack sufficient time to handle your assignments. Don’t despair; by using our academic writing service, you can be assured of perfect grades. Moreover, your grades will be consistent.
Engineering is quite a demanding subject. Students face a lot of pressure and barely have enough time to do what they love to do. Our academic writing service got you covered! Our engineering specialists follow the paper instructions and ensure timely delivery of the paper.
In the nursing course, you may have difficulties with literature reviews, annotated bibliographies, critical essays, and other assignments. Our nursing assignment writers will offer you professional nursing paper help at low prices.
Truth be told, sociology papers can be quite exhausting. Our academic writing service relieves you of fatigue, pressure, and stress. You can relax and have peace of mind as our academic writers handle your sociology assignment.
We take pride in having some of the best business writers in the industry. Our business writers have a lot of experience in the field. They are reliable, and you can be assured of a high-grade paper. They are able to handle business papers of any subject, length, deadline, and difficulty!
We boast of having some of the most experienced statistics experts in the industry. Our statistics experts have diverse skills, expertise, and knowledge to handle any kind of assignment. They have access to all kinds of software to get your assignment done.
Writing a law essay may prove to be an insurmountable obstacle, especially when you need to know the peculiarities of the legislative framework. Take advantage of our top-notch law specialists and get superb grades and 100% satisfaction.
What discipline/subjects do you deal in?
We have highlighted some of the most popular subjects we handle above. Those are just a tip of the iceberg. We deal in all academic disciplines since our writers are as diverse. They have been drawn from across all disciplines, and orders are assigned to those writers believed to be the best in the field. In a nutshell, there is no task we cannot handle; all you need to do is place your order with us. As long as your instructions are clear, just trust we shall deliver irrespective of the discipline.
Are your writers competent enough to handle my paper?
Our essay writers are graduates with bachelor's, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college degree. All our academic writers have a minimum of two years of academic writing. We have a stringent recruitment process to ensure that we get only the most competent essay writers in the industry. We also ensure that the writers are handsomely compensated for their value. The majority of our writers are native English speakers. As such, the fluency of language and grammar is impeccable.
What if I don’t like the paper?
There is a very low likelihood that you won’t like the paper.
- When assigning your order, we match the paper’s discipline with the writer’s field/specialization. Since all our writers are graduates, we match the paper’s subject with the field the writer studied. For instance, if it’s a nursing paper, only a nursing graduate and writer will handle it. Furthermore, all our writers have academic writing experience and top-notch research skills.
- We have a quality assurance that reviews the paper before it gets to you. As such, we ensure that you get a paper that meets the required standard and will most definitely make the grade.
In the event that you don’t like your paper:
- The writer will revise the paper up to your pleasing. You have unlimited revisions. You simply need to highlight what specifically you don’t like about the paper, and the writer will make the amendments. The paper will be revised until you are satisfied. Revisions are free of charge
- We will have a different writer write the paper from scratch.
- Last resort, if the above does not work, we will refund your money.
Will the professor find out I didn’t write the paper myself?
Not at all. All papers are written from scratch. There is no way your tutor or instructor will realize that you did not write the paper yourself. In fact, we recommend using our assignment help services for consistent results.
What if the paper is plagiarized?
We check all papers for plagiarism before we submit them. We use powerful plagiarism checking software such as SafeAssign, LopesWrite, and Turnitin. We also upload the plagiarism report so that you can review it. We understand that plagiarism is academic suicide. We would not take the risk of submitting plagiarized work and jeopardize your academic journey. Furthermore, we do not sell or use prewritten papers, and each paper is written from scratch.
When will I get my paper?
You determine when you get the paper by setting the deadline when placing the order. All papers are delivered within the deadline. We are well aware that we operate in a time-sensitive industry. As such, we have laid out strategies to ensure that the client receives the paper on time and they never miss the deadline. We understand that papers that are submitted late have some points deducted. We do not want you to miss any points due to late submission. We work on beating deadlines by huge margins in order to ensure that you have ample time to review the paper before you submit it.
Will anyone find out that I used your services?
We have a privacy and confidentiality policy that guides our work. We NEVER share any customer information with third parties. Noone will ever know that you used our assignment help services. It’s only between you and us. We are bound by our policies to protect the customer’s identity and information. All your information, such as your names, phone number, email, order information, and so on, are protected. We have robust security systems that ensure that your data is protected. Hacking our systems is close to impossible, and it has never happened.
How our Assignment Help Service Works
1. Place an order
You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.
2. Pay for the order
Proceed to pay for the paper so that it can be assigned to one of our expert academic writers. The paper subject is matched with the writer’s area of specialization.
3. Track the progress
You communicate with the writer and know about the progress of the paper. The client can ask the writer for drafts of the paper. The client can upload extra material and include additional instructions from the lecturer. Receive a paper.
4. Download the paper
The paper is sent to your email and uploaded to your personal account. You also get a plagiarism report attached to your paper.
PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET A PERFECT SCORE!!!