EconomicThis document has been made available on www.actuaries.org.uk with the permission of the Society of Actuaries‚ Schaumburg‚ Illinois. Copyright 2008. Specialty Guide on Economic Capital Version 1.5 March 2004 Specialty Guide on Economic Capital Section I. II. Page FOREWORD...................................................................................................................1 INTRODUCTION AND OVERVIEW .........................................................
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(Otuteye 1998) An arbitrage pricing theory is basically a theory that is copied from an issue model‚ using alteration or expansion and arbitrage arguments. This theory explains the joining amongst possible returns on securities‚ given that there are no occasions to create capital over risk-free arbitrage investments. The Capital Asset Pricing Model (CAPM) and the APT have developed as two models that have tried to exactly calculate the possible for assets to produce a profit or a loss. They are
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Midland Energy Resources Case Analysis Midland Energy Capital Planning Model • Fund significant overseas growth • As domestic natural resources dwindle‚ overseas investments are the main drivers of growth for Midland. These investments are analyzed and evaluated is US dollars (foreign cash flows are converted to US dollars) and have a US dollar discount rate applied to them. In 2006‚ 77.7% of Midland’s total earnings from equity affiliates came from non-US investments. • Invest in value creating
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For an investment to be worthwhile‚ the expected return on capital must be greater than the cost of capital. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. If a project is of similar risk to a company’s average business activities it is reasonable to use the company’s average cost of capital as a basis for the evaluation. A company’s securities typically include both debt and equity‚ one must therefore calculate both
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Investment Theory Elena Pikulina Overview From Portfolio Theory to the CAPM Investment Theory The Capital Asset Pricing Model CAPM: Assumptions and Implications The CAPM Equation SML and CML Elena Pikulina Sauder School of Business University of British Columbia Beta and Alpha 1 / 29 General Overview Investment Theory Elena Pikulina Overview From Portfolio Theory to the CAPM CAPM: Assumptions and Implications The CAPM Equation SML and CML Beta and Alpha • In the previous lecture (Portfolio
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Investment Valuation: How a company is valued by the investors is a good indicator of its future growth prospects. One way to measure valuation of the company is through a Price-to-Earnings ratio. This is calculated by dividing the last closing stock price with the Earnings per Share. This ratio basically tells us how much an investor is willing to invest to earn 1 dollar from the company’s earnings. Currently‚ the P/E ratio for Under Armour is 95.82 which is staggeringly high. Nike is valued at
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Analysis………………………………………………………..6-7 4.0 Industry Analysis…………………………………………………………..8-10 5.0 Company Profile..………………………………………………………….11 5.1 Key Financial Ratios………………………………………………11-12 6.0 Valuations………..…………………………………………………………15 6.1 Dividend Valuation Model…………………………………………14-16 6.2 Price-Earnings(P/E) Model.………………………………………..17 7.0 Limitations……………………………………………………………………18 8.0 Conclusions and Recommendations……………………………………...19 5.0 List of References……………………………………………………………20-22 APPENDIX
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value of the firm. However‚ many analyses should be made before making the decision to invest in determinant projects. The process by which the firm decides which investment is most profitable is called capital budgeting. There are different methods by which a firm can find the economic valuation for a project: net present value (NPV)‚ internal rate of return (IRR) and profitability index (PI). Even though the firm has different evaluation methods to help it decide which project to choose‚ the
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to invest in Nike’s stock‚ which has been declining in price in the past year. Kimi has asked her assistant‚ Joanna Cohen‚ to estimate Nike’s weight average cost of capital (WACC) to help make this decision (Case 13‚ pg. 58). We looked at Joanna’s estimates and discovered a few problems that she made when estimating her cost of capital. We found Joanna’s estimates to be wrong because of a few reasons. The first mistake she made was using the average beta instead of the most recent beta provided
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What is cost of capital? The cost of capital is the cost of obtaining funds‚ through debt or equity‚ in order to finance an investment. It is used to evaluate new projects of a company‚ as it is the minimum return that investors expect for providing capital to the company‚ thus setting a benchmark that a new project has to meet. Importance The concept of cost of capital is a major standard for comparison used in finance decisions. Acceptance or rejection of an investment project depends on the
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