Business Finance
Business Finance- Final Assessment | Naturally Fresh Plc | A report to the directors of Naturally Fresh Plc evaluating the financial position of a new project. The proposal concerns converting a number of farms in southern Europe into camp sites with effect from the 2012 holiday season. | | |
Section 1: The required rate of return on equity of naturally Fresh Plc at 31st December 2012
The rate of return on equity represents the percentage return a company needs to achieve to be worth investing in. Using the Capital Asset Pricing Model (CAPM), as it’s the most widely used and best known model of risk and return, we can determine the required rate of return on equity of Naturally Fresh Plc.
The basic principle of CAPM is to compensate investors by considering the risk and time value of money. It represents this by incorporating the following factors: 1. A risk- free rate(rf) 2. A beta(β) 3. Expected market return(rm)
These components then make up a formula, which is used to calculate the cost of capital, or return(r) on an investment. The formula is: r = rf + β (rm – rf)
The time value of the money is shown by the risk-free rate. This compensates the investors for placing money in any investment over a length of time. The latter half of the formula portrays the risk and computes the amount of compensation the investor requires for taking an additional risk.
In the case of Naturally Fresh Plc, the information provided from the company’s finance structure gives us a return rate of 10% (Appendix 1)
This rate of return means that if Naturally Fresh Plc wants to undertake any new projects or invest in new stock or securities, they’ll need to meet or beat a return of 10%. That way they will ensure it is an economically viable and worthwhile investment.
Section 2 :Implications of a beta less than 1 and the impact to Naturally Fresh Plc of a 5% increase or decrease on market returns.
Section 1: The required rate of return on equity of naturally Fresh Plc at 31st December 2012
The rate of return on equity represents the percentage return a company needs to achieve to be worth investing in. Using the Capital Asset Pricing Model (CAPM), as it’s the most widely used and best known model of risk and return, we can determine the required rate of return on equity of Naturally Fresh Plc.
The basic principle of CAPM is to compensate investors by considering the risk and time value of money. It represents this by incorporating the following factors: 1. A risk- free rate(rf) 2. A beta(β) 3. Expected market return(rm)
These components then make up a formula, which is used to calculate the cost of capital, or return(r) on an investment. The formula is: r = rf + β (rm – rf)
The time value of the money is shown by the risk-free rate. This compensates the investors for placing money in any investment over a length of time. The latter half of the formula portrays the risk and computes the amount of compensation the investor requires for taking an additional risk.
In the case of Naturally Fresh Plc, the information provided from the company’s finance structure gives us a return rate of 10% (Appendix 1)
This rate of return means that if Naturally Fresh Plc wants to undertake any new projects or invest in new stock or securities, they’ll need to meet or beat a return of 10%. That way they will ensure it is an economically viable and worthwhile investment.
Section 2 :Implications of a beta less than 1 and the impact to Naturally Fresh Plc of a 5% increase or decrease on market returns.