Financial Managment

Satisfactory Essays
MGMT 31000 – Financial Management

MGMT 310 - Financial Management

1

Buy Low, Sell High (p 435)
• An asset is said to be overvalued if its price is too high given its expected return and risk. Suppose you observe the following situation:
Security

Beta

Expected Return

SWMS Co.

1.3

14%

Insec Co.

0.8

10%

• The risk-free rate is currently 6 percent. Is one of the two securities overvalued relative to the other?

MGMT 310 - Financial Management

2

Buy Low, Sell High (p 435) - Solution
• To answer, we compute the reward-to-risk ratio for both. For SWMS, this ratio is (14%−6%)/1.3 =
6.15%. For Insec, this ratio is 5 percent. What we conclude is that Insec offers an insufficient expected return for its level of risk, at least relative to SWMS. Because its expected return is too low, its price is too high. In other words, Insec is overvalued relative to SWMS, and we would expect to see its price fall relative to SWMS’s. Notice that we could also say SWMS is undervalued relative to
Insec.
MGMT 310 - Financial Management

3

Systematic risk vs. Unsystematic risk (p
447)
• Consider the following information about Stocks I and II:

• The market risk premium is 7 percent, and the riskfree rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riskier”? Explain.
MGMT 310 - Financial Management

4

Systematic risk vs. Unsystematic risk (p
447) - Solution
• The amount of systematic risk is measured by the  of an asset.
• E(RI) = .25(.02) + .50(.21) + .25(.06) = .1250, or 12.50%
• Using the CAPM to find the  of Stock I, we find:
.1250 = .04 + .07I  I = 1.21

• The total risk of the asset is measured by its standard deviation.
• I2 = .25(.02 – .1250)2 + .50(.21 – .1250)2 + .25(.06 –
.1250)2 = .00743
• I = (.00743)1/2 = .0862, or 8.62%

MGMT 310 - Financial Management

5

Systematic risk vs. Unsystematic risk (p
447)

You May Also Find These Documents Helpful

  • Good Essays

    Financial Managment

    • 713 Words
    • 3 Pages

    Financial Management Practices Good financial management is crucial for the expansion of any business. Successfully placing finances in order means a business can work more efficiently. One of the essential challenges in health care is to manage effectively the finances of the organization. Health care is unique in the way an organization operates based on the finances. This paper will identify effective and ineffective financial management practices that can help to make a company successful…

    • 713 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Financial Managment

    • 1037 Words
    • 5 Pages

    SeaHorse – Stock Evaluation Group Project – Financial Management Section II Date: 15-Apr-13 By: Spiros KOURTIS – Christos THEODOROU Evi BAXEVANAKI – Georgia LIAPI. Page 1 Key data for the calculations: • • • Stock issued for Seahorse = [IS] = 2 Shareholders x 150,000 shares / each = 300,000 stocks Dividends paid D0 = 2 x $320,000 = $640,000 or DPS = $640,000 / 300,000 = $2.13 Calculation of company SeaHorse growth rate gSH = ( 1 – Dividend pay out Ratio) x ROE Dividend Payout Ratio (DPR) is equal…

    • 1037 Words
    • 5 Pages
    Satisfactory Essays
  • Powerful Essays

    Financial Managment

    • 2863 Words
    • 12 Pages

    Introduction This assignment was given for student doing Financial Management 1 (BBPW 3103). This report is based on an analysis of the financial performance of Two Malaysian Companies by using their financial statements for the year 2011. The global steel industry has continued to face a challenging period since 2011. Mainly due to the higher inputs costs and also increase in external environment. Thus, for this assignment I have chosen two leading companies in Malaysian steel industry. Namely:…

    • 2863 Words
    • 12 Pages
    Powerful Essays
  • Powerful Essays

    Financial Managment

    • 2169 Words
    • 9 Pages

    very important for the constitution of the capital structure are a. Legal requirement b. Purpose of finance c. Period of finance d. Requirement of investors 9. It is that portion of an investments total risk that results from change in the financial integrity of the investment a. Bull- bear market risk b. Default risk c. International risk d. Liquidity risk 10. _____________ measure the systematic risk of a security that cannot be avoided through diversification a. Beta b. Gamma c…

    • 2169 Words
    • 9 Pages
    Powerful Essays
  • Good Essays

    Managment

    • 1024 Words
    • 5 Pages

    concept of risk is not a simple concept in finance. There are many different types of risk identified and some types are relatively more or relatively less important in different situations and applications. In some theoretical models of economic or financial processes, for example, some types of risks or even all risk may be entirely eliminated. For the practitioner operating in the real world, however, risk can never be entirely eliminated. It is ever-present and must be identified and dealt with…

    • 1024 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Managment

    • 591 Words
    • 3 Pages

    analyze the decision by identifying the advantage and disadvantage of manufacturing more product in Netherlands. The advantage is Hollandsworth would not take any financial risk, no borrowing would be necessary. Also, Axeon Dutch operations would see benefits from a lower variable cost for the entire product produced realizing financial rewards for them as well. When the production is increased in Netherlands, it will result in decreasing of fixed cost (mentioned in text by 240 per tons). Besides…

    • 591 Words
    • 3 Pages
    Good Essays
  • Better Essays

    managment

    • 2312 Words
    • 8 Pages

    through the environmentally sensitive Huascaran National Park “PNH”. There was a clear opposition from the side of The Mountain Institute NGO, UNESCO and national park authorities which could make a conflict in the result of which international financial institutions may question their willingness to provide funding to CMA. Resettlement issue In order to start the construction of the mining plant the CMA was to implement the resettlement plan which would insure that affected families would attain…

    • 2312 Words
    • 8 Pages
    Better Essays
  • Powerful Essays

    For Managment

    • 1001 Words
    • 5 Pages

    MANAGEMENT ACCOUNTING CHAPTER 3: RATIO ANALYSIS QUESTION BANK 1. Given: Current Ratio = 2.8 Acid-test ratio = 1.5 Working Capital = Rs. 1,62,000 Find out: (a) Current Assets (b) Current Liabilities (c) Liquid Assets 2.Given: Current Ratio 2.5 Liquidity Ratio 1.5 Working Capital Rs. 60,000 Calculate: (a) Current Liabilities (b) Current Assets (c) Liquid Assets (d) Stock 3. Find out Current Assets (a) When current ratio is 2…

    • 1001 Words
    • 5 Pages
    Powerful Essays
  • Better Essays

    Managment

    • 771 Words
    • 4 Pages

    Name: Sara Kh. Mohamed Date: 19.Feb.13 Finalcial Management Control Asignment 1 Vodafone Ratio Analysis What 's the concept of Ratio? involves methods of calculating and interpreting financial ratios to analyze & monitor the firm’s performance Liquidity Ratios The liquidity of a firm is measured by its ability to satisfy its short-term obligations as they come due. Current Ratio A measure of liquidity calculated by dividing the firm’s current assets by its current liabilities. Generally…

    • 771 Words
    • 4 Pages
    Better Essays
  • Best Essays

    Managment

    • 4581 Words
    • 19 Pages

    (Final Examination Student: Thant Zin Aung Student ID: 131537 Lecturer: Dr. Peggy Chen Subject: Management JNB 517 Course: Graduate Diploma Maritime & Logistics Management Due Date: 20 June 2011 Word Count: 3294 1 QUESTION 1 a ) Maersk Singapore Private Limited, represents Maersk Line, whose fleet comprises more than 500 vessels and a number of containers corresponding to more than 1,900,000 twenty foot equivalent unit in Singapore (Maersk Line n.d.) .Dominant…

    • 4581 Words
    • 19 Pages
    Best Essays