Business Finance
BUSINESS FINANCE
FAO: DIRECTORS, NATURALLY FRESH PLC
CONTENTS Page(s) 1. Introduction 3
2. Required Rate of Return on Equity 3
3. Beta 3
4. Capital Asset Pricing Model 4 5.1 Limitations of CAPM 4 5.2 The APT Model 4 5.3 The Three-Factor Model 4 5.4 Required Rate of Return using APT or Three-Factor 5
Model
5. Bonds 5 6.5 How bond prices are determined 5 6.6 The Rate of Return on the bonds 6
6. Conclusion
7. Appendices
6.1 Appendix 1 – after tax rate of return on bonds 7
6.2 Appendix 2 – Excel Working and screen shot
8. References
9. Bibliography
1. Introduction
Naturally Fresh Plc are considering converting a number of their farms in Southern Europe into campsites following difficult trading conditions.
This report will look at the required rate of returns on the equity as well as the bonds, whilst explaining the models used to calculate the returns and also provide a recommendation on whether the investment opportunity should be accepted by Naturally Fresh Plc.
2. Required Rate of Return on Equity Key | | E(R) | Expected/Required Rate of Return | R(f) | Risk Free Rate | B | Beta | R(m) | Market Return | R(m)-R(f) | Market Premium |
Capital Asset Pricing Model (CAPM):
E(R) = Rf + B(Rm-Rf)
E(R) = 2% + 0.8(12%-2%)
E(R) = 10%
The required rate of return, which is the minimum yield that investors require in order to select a particular investment, was calculated using the CAPM. The CAPM is a model that describes the relationship between risk and return and is calculated using three inputs; risk free rate, beta and the market return.
The risk free rate is a rate of interest which can achieved without any risk of default. The beta is a measure of stock volatility in relation to the stock market and the market return is the return
FAO: DIRECTORS, NATURALLY FRESH PLC
CONTENTS Page(s) 1. Introduction 3
2. Required Rate of Return on Equity 3
3. Beta 3
4. Capital Asset Pricing Model 4 5.1 Limitations of CAPM 4 5.2 The APT Model 4 5.3 The Three-Factor Model 4 5.4 Required Rate of Return using APT or Three-Factor 5
Model
5. Bonds 5 6.5 How bond prices are determined 5 6.6 The Rate of Return on the bonds 6
6. Conclusion
7. Appendices
6.1 Appendix 1 – after tax rate of return on bonds 7
6.2 Appendix 2 – Excel Working and screen shot
8. References
9. Bibliography
1. Introduction
Naturally Fresh Plc are considering converting a number of their farms in Southern Europe into campsites following difficult trading conditions.
This report will look at the required rate of returns on the equity as well as the bonds, whilst explaining the models used to calculate the returns and also provide a recommendation on whether the investment opportunity should be accepted by Naturally Fresh Plc.
2. Required Rate of Return on Equity Key | | E(R) | Expected/Required Rate of Return | R(f) | Risk Free Rate | B | Beta | R(m) | Market Return | R(m)-R(f) | Market Premium |
Capital Asset Pricing Model (CAPM):
E(R) = Rf + B(Rm-Rf)
E(R) = 2% + 0.8(12%-2%)
E(R) = 10%
The required rate of return, which is the minimum yield that investors require in order to select a particular investment, was calculated using the CAPM. The CAPM is a model that describes the relationship between risk and return and is calculated using three inputs; risk free rate, beta and the market return.
The risk free rate is a rate of interest which can achieved without any risk of default. The beta is a measure of stock volatility in relation to the stock market and the market return is the return
References: 1. Ben McClure. (2004). The Capital Asset Pricing Model: An Overview. [Online]. Available from: http://www.investopedia.com/articles/06/CAPM.asp#axzz1t08jad1k [Last accessed 10th April 2012]. 2. Edgardo Donovan (2007) Capital Asset Pricing Model (CAPM) vs. Arbitrage Pricing Theory (APT). 1 (1), p2-5. 3. Eugene F. Fama and Kenneth R. French (2004). The Capital Asset Pricing Model: Journal of Economic Perspectives, Volume 18 (2), p2-46 4 5. Michael Griffis. (2011) Economic Indicators for Dummies. Hoboken, John Wiley & Sons, Inc. 6. Moorad Choudhry. (2001) The Bond and Money Markets: strategy, trading, analysis. Great Britain, The Bath Press. 7. Richard A. Brealey, Stewart C. Myers, Franklin Allen. (2010) Principles of Corporate Finance Global Edition. 10th Edition. New York, The McGraw-Hill Companies Inc. 8. Tony Head (2008) CAPM: THEORY, ADVANTAGES, AND DISADVANTAGES. THE CAPITAL ASSET PRICING MODEL. 1 (1), p50-52. 8. Bibliography James, P.C., 2010 Krishna, G.P., Paul, M.H and Erik, P., 2010. Business Analysis and Valuation IFRS edition: Text and Cases. 2nd ed. United States: Cengage Learning. Manuel, K., 2008. Limitations of the Capital Asset Pricing Mode, Criticisms and new developments. Munich: GRIN Verlag. Richard, A.B and Stewart, C.M., 2003 Richard, A.B., Stewart, C.M. and Alan, J.M., 1995. Fundamentals of Corporate Finance. 7th ed. United States: McGraw-Hill/Irwin. Robert, W.K. and Donald, S., 2010. Corporate Boards: managers of risk, sources of risk. Chichester, West Sussex: Wiley-Blackwell. Steve, L., and Chris, J., 2011. Corporate Finance Theory and Practice. 11th ed. United States: Cengage Learning.