...and his wife, Mary, took advantage of the “players” in the large corporations. Albert and Mary would go to parties and get information from them after the “players” had a few alcohol drinks. Both started using this strategy and five months later their clients began to see significant profits in their portfolios. Another ethical issue I see is Albert’s uncle worked as a janitor which gave his access to many law offices that had information on a number of companies, especially those about to file for bankruptcy. Mary and Albert both were able to use this information provided by his uncle to benefit their clients’ portfolios. A third ethical issue is Mary used insider information from her father who worked for a major health care company. The management team was running the company into the ground. Mary found a company that was interested in doing a hostile takeover. Mary told several of her best clients, who in turn did very well on the stock. All of this increased her status with the firm that she worked for and kept drawing bigger clients. The legal issue that I see is the e-mails Mary is receiving from some of the brokers. Some of the other brokers are sending e-mails with off-color jokes and even nude photos of men and women. E-mail is not private in the workplace. Employees own the company e-mail system and therefore are covered under law to monitoring rights. Employees should be aware that any e-mail they send or receive through their company e-mail account can be read by...
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...technical page 50 student accountant JUNe/JULY 2008 CAPM: THEORY, ADVANTAGES, AND DISADVANTAGES THE CAPITAL ASSET PRICING MODEL RELEVANT TO ACCA QUALIFICATION PAPER F9 Section F of the Study Guide for Paper F9 contains several references to the capital asset pricing model (CAPM). This article is the last in a series of three, and looks at the theory, advantages, and disadvantages of the CAPM. The first article, published in the January 2008 issue of student accountant introduced the CAPM and its components, showed how the model can be used to estimate the cost of equity, and introduced the asset beta formula. The second article, published in the April 2008 issue, looked at applying the CAPM to calculate a project-specific discount rate to use in investment appraisal. CAPM FORMULA The linear relationship between the return required on an investment (whether in stock market securities or in business operations) and its systematic risk is represented by the CAPM formula, which is given in the Paper F9 Formulae Sheet: E(ri) = Rf + βi(E(rm) - Rf) E(ri) = return required on financial asset i Rf = risk-free rate of return βi = beta value for financial asset i E(rm) = average return on the capital market The CAPM is an important area of financial management. In fact, it has even been suggested that finance only became ‘a fully-fledged, scientific discipline’ when William Sharpe published his derivation of the CAPM in 19861. CAPM ASSUMPTIONS The CAPM is often criticised as being unrealistic...
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...Business have to make many financial decision that a direct impact on operations and the ability to successfully compete in the marketplace. I will assume that I am a financial advisor to a business. I will give advice that I would give to the client for raising business capital using both debt and equity options in today’s economy. I will give advantages and disadvantages of each option. I will summarize the advice that I will give the client on selecting an investment banker to assist the business in raising capital. I will discuss the historical relationships between risk and return for common stock versus corporate bonds. I will explain the manner in which diversification helps in risk reduction in portfolio. I will support my response with actual data and concept learn from class. As financial advisor to a business I will give my client advice on raising business capital using debt and equity capital with their advantages and disadvantages. As my clients advisor I would describe the two most common types of financing which are debt and equity capital. I would tell them the difference between the two and the advantage and disadvantage of the two. Debt capital is an agreement contract between lenders and companies trying to start or grow its organizations. All debt issued have a maturity date when the firms are to pay the bond principal (par-value or face value) to the bond holders. Business can borrow from banks, one popular source of debt financing is commercial finance companies...
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...assumptions. Discuss in the light of recent developments in the area.’ MN 3365 Strategic Finance Table of Contents Introduction Concept of CAPM Assumptions of CAPM . Other Suggested Models Disadvantages of CAPM Advantages of CAPM Problems in applying CAPM Conclusion Bibliography / References INTRODUCTION This essay will highlight the use of Capital asset pricing model ( CAPM ) to be considered as a pricing theory model for assets . CAPM model helps investors to analyse the risk and what expectation to keep from an investment (Banz , 1981) . There are two types of risk associated with CAPM known as systematic and unsystematic risk . The systematic risks are market risk which cannot be diversified such as fluctuations in interest rates and recession in the economy .Unsystematic risk are risks associated with an individual stock , it occurs when an investor increases the number of stocks on his portfolio. The unsystematic risk cannot be diversified as it is related an individual stock irrespective to the general market . (Amihud and Lev, 1981). The CAPM was introduced independently by Jack Trenor (1961 , 1962) , Jan Mossin (1996) and William F . Sharpe (1964) , it is basically an uplifment of the existing work of Harry Markowitz on modern portfolio therory as well as diversification which was given a name as CAPM (Investopedia , 2003). After approximately 4 decades of CAPM being introduced , it is still widely used by investors to determine the ...
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...Diversification A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. Diversification strives to smooth out/reduces unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated. Advantages and disadvantages of diversification Diversifying your investment portfolio can protect you from localized fall in the market, but it can also prevent you from making big money. The question of what breadth of diversification is appropriate is an ongoing conversation among financial professionals. Finding the right diversification level for yourself involves an analysis of your assets and your tolerance of risk. Advantages Risk reduction When your assets are widely diversified, your portfolio tends to perform in a similar way to the market as a whole. If you own stocks in 20 different areas and one of them takes a dive, it's unlikely that your portfolio will suffer terribly. Diversification is the best way to increase the stability of your investments and decrease your risk of losing money in the event that a single area decreases in value...
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...Scenario #1: You are a manager of a company that has recently purchased a smaller company. The purchased company has an existing product, which will now be part of your product offering. The product is a weight-loss supplement called Weight Loss Optimizer. The product has been very successful for the previous owner, but the company had limited ability to adjust its manufacturing system to accommodate growth, as well as a limited potential sales audience. Your role is to oversee and coordinate all aspects of launching the product from the newly acquired company. You have a far greater manufacturing capacity and more potential customers readily available because you already sell several weight-loss related products to a large base of customers. Weight Loss Optimizer has been proven successful by a research study. The study consisted of 100 participants, 90% of whom lost at least 15 pounds over a reasonable time period. To date, the study participants have successfully maintained their weight loss by continuing to use the product. Of the users, 80% were able to maintain their weight loss with continued use of Weight Loss Optimizer. The 10% of study participants who were not successful may have been unsuccessful because they did not follow the program’s protocol as set forth. An inherent risk in a weight loss product is the inability to determine if the product has failed to produce results or if the user has not followed directions. Dissatisfied customers present a challenge as...
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...12 months. This ratio can be determined by dividing the current assets by the current liabilities found on the company’s balance sheet. Total debt ratio is exactly what it says, a measure of the company’s debt. The total debt ratio is total debt divided by total assets. Profit margin is simply how much profit is made. Net income divided by sales shows profits. Each of these can be used for any size business (Ward, n.d.). If current ratio was to show an inability to cover the costs, debt financing may be a solution. As with all financial options, there are advantages and disadvantages. One advantage of debt financing is that it allows the founders of the company to maintain control and ownership of the company. Another advantage is that the interest paid on the loan may be tax deductible depending on the type of loan. The best part is the lenders you borrow money from do not share in your profits. The main disadvantage is the risk of credit ratings getting ruined or filing for bankruptcy (Peavler, n.d.) An organization can choose to either issue stocks or bonds...
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...Inditex’s “multi-brand strategy”/”multi-store concept strategy” Inditex’s broad brand portfolio, which comprises eight brands, serves to reduce risk and refine the company’s targeting of specific customer groups. Inditex’s main fascias, Zara, Stradivarius and Massimo Dutti, have achieved high levels of consumer recognition. In 2008, Inditex introduced Uterqüe, its eighth brand. Inditex’s multi-brand strategy has helped it broaden its customer base, for example through the Bershka fascia, which has successfully attracted a younger generation. The principle of having a “multi-brand strategy” Basically, I agree with the principle of having a multi-brand strategy. In today’s highly competitive retail market, targeting a specific customer demographic might not just be the most efficient way to go. But being able to cater to a wide range of tastes and budgets, on the other hand might be more target-oriented. This seems to be especially true with relatively lower-cost items, in particular when there is little if any brand loyalty. Looking at several multi-brand companies, I can see that most exist in the B2C industries such as Inditex at hand but also for example Proctor & Gamble (FMCG), L’Oréal (cosmetics), Volkswagen (automotive) as well as Pfizer (pharma). Companies in B2C industries pay more attention to market segmentation than companies in B2B industries. Market segmentation is a good way to increase the company’s influence to consumers who make purchasing decisions based...
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...It starts with an idea s t a g e s o f innovation Best Practices in Brand Extension: Effective Application of Brand Recognition BRAND EQUITY CAN BE DIVIDED INTO THREE COMPONENTS: EXPERTISE, EMOTIONAL ATTACHMENTS AND PRODUCT ATTRIBUTES Brand extensions are an effective and popular method of gaining a competitive advantage when entering a new product area. Consumers are faced with an increasingly complex and confusing marketplace. The ability of a brand to act as a mental shortcut for consumers, thereby simplifying the decision-making process, makes it one of, it not the, most important asset for a company. The ability of a brand to influence consumer behavior, and its subsequent value to companies, will increase as consumers face a growing amount of information in the marketplace. By placing a well-known brand on a new product, a company can imbue that product with all the positive associations of that brand, thereby giving it a competitive advantage. With some estimates of the failure rate for new products at 90%, the added value of being associated with a trusted brand can be critical to a new product’s survival. Given the increasing value of established brands and the difficulty in launching new products, the popularity of brand extensions is understandable. However, the brand extension process must be carefully planned in order to insure the value of the brand is successfully transferred to the extension without jeopardizing the brand’s equity. To do so, a company...
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...Yasmeen Iman Snow Deforest Thompson Gary Oha CAPM Yasmeen Iman Snow Deforest Thompson Gary Oha CAPM Contents Overview of CAPM 1 Advantages and Limitations 3 Breakthroughs and Setbacks 4 Works Cited 6 Overview of CAPM The CAPM was introduced by Jack Treynor , William F. Sharpe , John Lintner and Jan Mossin in 1964, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory (Fama & French, 1982). Sharpe, Markowitz and Merton Miller jointly received the 1990 Nobel Memorial Prize in Economics for this contribution to the field of financial economics. Fischer Black developed another version of CAPM, called Black CAPM or zero-beta CAPM that does not assume the existence of a riskless asset. This version was more robust against empirical testing and was influential in the widespread adoption of the CAPM (Fama & French, 1982). CAPM has become very attractive as a tool that measures risk to possible in relation to expected return, although it is still widely used for estimating the cost of capital for firms and evaluating the performance of managed portfolios. While CAPM is accepted academically, there is empirical evidence suggesting that the model is not as profound as it may have first appeared to be. CAPM’s empirical fallings arise theoretically from many over simplified assumptions made by the model. This has made it difficult to implement valid test for this model (Kristina Zucchi...
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...shares at net asset value. B) The funds offer investors professional management. C) The funds offer investors a guaranteed rate of return. D) B and C. E) A and B. Answer: C Difficulty: Moderate Rationale: No investment offers a guaranteed rate of return. 2. Which one of the following statements regarding closed-end mutual funds is false? A) The funds always trade at a discount from NAV. B) The funds redeem shares at their net asset value. C) The funds offer investors professional management. D) A and B. E) None of the above. Answer: D Difficulty: Moderate Rationale: Closed-end funds are sold at the prevailing market price. 3. Which of the following functions do mutual fund companies perform for their investors? A) Record keeping and administration B) Diversification and divisibility C) Professional management D) Lower transaction costs E) All of the above. Answer: E Difficulty: Easy Rationale: Mutual funds are attractive to investors because they offer all of the listed services. 4. Multiple Mutual Funds had year-end assets of $457,000,000 and liabilities of $17,000,000. There were 24,300,000 shares in the fund at year-end. What was Multiple Mutual's Net Asset Value? A) $18.11 B) $18.81 C) $69.96 D) $7.00 E) $181.07 Answer: A Difficulty: Moderate Rationale: (457,000,000 - 17,000,000) / 24,300,000 = $18.11 5. Growth Fund had year-end assets of $862,000,000...
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...Nike Inc. Case 1. What is the WACC and why is it important to estimate a firm’s cost of capital? WACC is weighted average cost of capital, which is the expected rate of return on average from all the company’s existing debts and securities. It takes into account all different types of financing in the company’s capital structure. The reason it is important to estimate WACC is because it measures what it costs the firm to take on a project based on its current Debt and Equity mix. When the firm decides to take on a project it needs to discount the future cash flows of the project by the company’s WACC to determine whether or not to take the project on. High WACC generally indicates more risk since the company pays more for its capital. It is generally used by managers to decide if a new investment project is worthwhile. All developing firms require more capital to accommodate more demand. As a result, the firm needs more capital. Capital is raised through debt, preferred stock and common equity. Debt is acquired either through bonds or through borrowing from banks. The common equity form of the capital can be raised through either retaining the earnings and reinvest in the future company development or it can be raised through issuing common stock. The preferred stock is the least favorite method to raise capital. While interest payments provide the earnings for holders of debt, the cost of equity is the opportunity cost demanded by investors for making the funds available...
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...Assignment: Understanding the Concepts FIN 100 – Principles of Finance Assignment: Understanding the Concepts Ever dream of owning your own business? The life of a business owner can be a glorious one with many exciting benefits such as a big house, a nice car, and oodles of money. According to (Henderson, 2012), “The average income of small business owners varies widely depending upon their level of experience. For example, small business owners with less than one year of experience in running an organization earn an annual salary ranging from $34,392 to $75,076. Those with more than 10 years’ experience, on the other hand, earn upwards of $105,757 per year”. As seen here, experience literally pays off big and is all about making good decisions in business. Some of the first decisions a business can make is determining the financial strategy. Financial Ratios Important to Large and Small Businesses Before a business can determine the best financial strategy, they must identify the strengths and weaknesses of their business. One way this is done is by computing ratios that compare values of key accounts listed on the financial statements. There are a lot of financial ratios that can be determined by business owners and managers through analyzing these financial statements. Depending on your size of business and the experience of the business people, will determine the best financial strategies for their firms. According to Bankrate.com, “A financial ratio...
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...FNCE 370v8: Assignment 4 Assignment 4 is worth 5% of your final mark. Complete and submit Assignment 4 after you complete Lesson 12. There are 12 questions in this assignment. The break-down of marks for each question is presented in the table below. Please show all your work as this will help the marker give you part marks as well as serve as a good study aid as you prepare for the Final Examination. Question | Marks Available | Reference | 1 | 5 | Lesson 10 | 2 | 5 | Lesson 10 | 3 | 5 | Lesson 10 | 4 | 5 | Lesson 10 | 5 | 10 | Lesson 11 | 6 | 15 | Lesson 11 | 7 | 10 | Lesson 11 | 8 | 10 | Lesson 11 | 9 | 5 | Lesson 12 | 10 | 10 | Lesson 12 | 11 | 10 | Lesson 12 | 12 | 10 | Lesson 12 | Total | 100 | | 1. Explain the interactions among market efficiency, capital budgeting, and the cost of capital. (5 marks) In order to make good capital budgeting decisions the manager should use a correct cost of capital which is determined by the use of funds. The NPV in an efficient market will be zero which indicates that managers should explore positive NPV projects to to determine the cshflow estimate and the source of value. When the market is efficient the cost of capital in the market is a good estimate of the return required. (5 marks) a. Give two examples of anomalies in the financial markets. Seasonality of stock prices (January Effect) which is when firms with small capitalizations have high returns in the first days of the new year...
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...“Moderate” and “Budget” classifications: a. Volume: 6 Million Units b. Market Share = 80% of active-wear market ii. 2009 Industry Sales Volume Estimates: * Expected growth rate: 4.2% * Active-wear sales volume estimated at 15 million units * 200% growth from 2007 * Women’s active-wear in “Better” classification: a. Volume: 6,000,000 Units b. Market Share: 40% of active-wear market c. Average Price Point: Just below 100 iii. Competition: * Liz Claiborne * 396 retail stores * Diversified brand portfolio * Jones Apparel Group * 338 retail stores * Diversified brand portfolio B. Company: Harrington Collection i. Expected Market Share for Vigor active-wear line: 7% iv. Vigor’s expected sales volume in 2009: * 420,000 units in the “Better” classification for women’s active wear * $39,900,000 in the “Better” classification for women’s active wear C. Trends: ii. Mature market: Short product life cycles iii. Increased price pressure for firms * 50% of all women’s apparel is purchased on sale * Outsource production for low cost labor iv. Rapid growth of demand...
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