MCR006 Financial Management Report 2 Sample

MCR006 Financial Management. Ass 2

Management – Research report

This assessment consists of one part a research-based topic.

Part A 40 marks weight 20%

Students will be required to research the topic relating to the concept of the definition and application of the CAPM (Capital Asset Pricing Model) model. Explain the concept of the Capital Asset pricing Model (CAPM) and how it is utilised to determine the required return on a share. Explain why Beta is important and how it is calculated.

Required

a) The paper should include information about how CAPM is calculated and how it is applied and interpreted. One to one and a half(11⁄2) pages. Students should research and provide a minimum of 3 referneces.20 marks

b) A final requirement is to calculate the three-year Beta for a publicly listed company from those companies listed on the ASX. 20 marks

c) Students can use an excel spreadsheet to calculate an provide detail in the report using a snapshot into the word document and provide a brief explanation of the company and a brief interpretation of your calculation. (Half page for calculation and half page for brief description of company and interpretation).

Solutions

Introduction

“The Capital Asset pricing model or CAPM" refers to the financial model that helps in calculating the expected rate of return from any kind of investment or asset. As per the MBA  Assignment expert Overview, In this study, the definition and application of CAPM and how it is being utilized for determining the required return on share are being evaluated along with the three-year Beta of Apple Technology Company.

Discussion

Concept

CAPM is calculated by conducting the expected rate of return for both the market and risk-free assets on the assets correlation and sensitivity. It helps in analyzing the return on investment with equal to the risk-free rate using the risk premium. It helps in selecting the best portfolio which helps in providing investors with a detailed overview of the maximum return from a given risk level. The CAPM model has an imperative position in the asset pricing literature (Kumar et al., 2023). A stock portfolio aims to select the most efficient combination of stocks that provide the highest expected return in the future with a certain risk level and in addition to maximizing returns also helps in avoiding risk as all stock investments help to increase their returns(Pramono et al., 2022). The formula for CAPM is the Expected return (ke)=  rf + β (rm – rf) in which kw equals “cost of equity or expected return, rf equals to risk-free rate, B= beta,(rm-rf)-Equity Risk premium”. Hence, dealers are required to optimize their investment choices concerning important portfolios of business in mean-variance and such by using any kind of risk-based pricing model. The CAPM model is user-friendly and helps in creating a diversified portfolio similar to a market portfolio. It helps in eliminating unsystematic risk for investors. It helps businesses navigate opportunities and analyze if the business mix would differ from the current business.

Figure 1: Capital Asset Pricing Model
(Source: wallstreetprep, 2023)

This figure implies the Capital Asset Pricing Model (Figure 1). Investors seek to change their investment choices by building efficient portfolios in mean-variance and efficient portfolios by using any kind of “risk-based pricing model” (Ayub et al., 2020). CAPM helps investors in conducting performance valuation, portfolio contribution, and security selection. The metrics of CAPM allow assessing and evaluating the portfolio performance that helps managers to perform in a better manner than their passive counterparts. It helps in assuming that investors have homogeneous expectations and are risk averse and assessing the value of creating risky portfolios. CAPM calculated price helps in reflecting the belief of investors in the market. CAPM helps in analyzing the systemic and unsystematic risks. Securities are not included in the index that is being evaluated relative to the index for determining the suitability of conducting portfolio inclusion.

Three-year Beta of Apple

Beta is considered the measurement of stock volatility in comparison to the overall stock market. Higher beta value indicates that the stock is considered more risky and will have significant fluctuations in comparison to the market and lower Beta indicates less volatility in comparison to the market. In the study, the three Beta for Apple is being provided for the year 2020, 2021 and 2022. In the return column of the Excel sheet, the percentage of returns generated is mentioned. It is concluded after evaluating the percentage of return the share, Apple generated was more in 2020 in comparison to 2021 and 2022.

Figure 2 : Three year Beta Calculation of Apple
(Source: Self-created)

Company details

Apple's business models are dependent on consumer-centric and innovation-based devices as they maintain their foundation for easy-to-use designs and data migration for new product lines. It is a numerical multinational company based in California. Apple gains its competitive edge with its innovative products, which would help in meeting the ever-changing needs of customers around the world. Apple is considered more appealing from a total return standpoint and it has produced an average of 25.1% yearly return for its shareholders in the last 15 years (Brock, 2023).

Figure 3: Stock return percentage
(Source: Self-created)

Determining return on share

Return on share implies the income that will be generated from his investment every year and is significantly quoted as the percentage of the original value of the investment. The investor gets a return on his investment in shares and investment portfolio when they distribute dividends. The CAPM model helps in establishing a linear relationship between the required return on investment and risk. Its formula for generating returns is “Expected return” = “Risk-free rate” + “Beta X market return premium”. 

CAPM helps in deriving the systemic rocks, the “perils of investing”, and the expected “return of assets” particularly in stocks. It is considered a finance model that helps establish a linear connection between the needed “return on investment” and “risk”. Investors seek stable distribution of dividends, as stable distribution of dividends helps increase the investor’s confidence in the company (Rahmadi, 2020). Return of capital refers to the meaning of the organization’s net income about the sum of its debt and equity value. It implies that the expected return on security is considered equal to the risk-free return along with risk premium based on beta security. Systematic market risks are being prioritized as the core modern asset pricing (Hendershott et al., 2020).

Conclusion

CAPM helps in conducting the objective nature of the estimated equity costs. It helps in conducting an idealized portrayal of how financial markets and price securities which helps in determining the expected return on capital investments. The three-year beta return of appeal for the years 2020, 2021, and 2022 is being evaluated. The formula that will be adopted by the CAPM model for determining the return of shares is also described in the study.

Reference List

Websites

Capital Asset Pricing Model (CAPM). Wall Street Prep. (2023, September 12). https://www.wallstreetprep.com/knowledge/capm-capital-asset-pricing-model/

Brock, C. (2023, October 3). Apple Stock Dividend Analysis. Forbes. https://www.forbes.com/sites/investor-hub/article/apple-stock-dividend-analysis/#:~:text=The%200.55%25%20 dividend%20 yield%20 pales,over%20the%20last%2015%20 years. https://www.forbes.com/sites/investor-hub/article/apple-stock-dividend-analysis/#:~:text=The%200.55%25%20 dividend%20 yield%20 pales,over%20the%20last%2015%20 years.
Journals

Ayub, U., Kausar, S., Noreen, U., Zakaria, M., & Jadoon, I. A. (2020). Downside risk-based six-factor capital asset pricing model (CAPM): A new paradigm in asset pricing. Sustainability, 12(17), 6756. doi:10.3390/su12176756 

Hendershott, T., Livdan, D., & Rösch, D. (2020). Asset pricing: A tale of night and day. Journal of Financial Economics, 138(3), 635-662.https://doi.org/10.1016/j.jfineco.2020.06.006

Kumar, S., Kumar, A., Singh, K. U., & Patra, S. K. (2023). The Six Decades of the Capital Asset Pricing Model: A Research Agenda. Journal of Risk and Financial Management, 16(8), 356.DOI:  https://doi.org/10.3390/jrfm16080356 

Pramono, E. S., Rudianto, D., Siboro, F., Baqi, M. P. A., & Julianingsih, D. (2022). Analysis of investor index Indonesia with capital asset pricing model (CAPM). Aptisi Transactions on Technopreneurship (ATT), 4(1), 35-46.:DOI: https://doi.org/10.34306/att.v4i1.218

Rahmadi, Z. T. (2020). The Influence of Return on Investment, Current Ratio, Debt To Equity Ratio, Earning Per Share, and Firm Size To the Dividend Payout Ratio in Banking Industries Listed In Indonesia Stock Exchange Period 2013-2018. Dinasti International Journal of Digital Business Management, 1(2), 260-276. DOI:10.31933/DI JDBM