Financial & Growth : Risk, Npv and Irr
Finance and Growth Strategies
QUESTION 1 a) Distinguish between systematic and unsystematic risk. as the only relevant risk and why? b) In the context of the Capital Asset Pricing Model how would you define beta? How are betas determined and where can they be obtained? limitations of betas? c) What information does beta give to a financial manager? What are the Which is often regarded
QUESTION 2 a) What is the time value of money? flows? b) What factors need to be taken into account when choosing an appropriate discount rate? c) What do you understand by the terms (i) “net present value” (NPV) and (ii) “internal rate of return” (IRR)? d) Compare and contrast the NPV and IRR. Why is it important to “discount” future cash
CONTENTS
PART ONE: QUESTION 1 1. INTRODUCTION . 2. RISK 2.1 2.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 4 5 6 6 7 7 8 10
Systematic Risk and Unsystematic Risk Why Systematic Risk is OftenRegarded?. . . . . . . . . . . . . . . . .
3. BETA (β) 3.1 3.2 3.3 3.4
Definition of Beta .
How to Determine Betas . Limitations of Betas .
Information Given to a Financial Manager. .. . . . . . . .
4. CONCLUSION
PART TWO: QUESTION 2 5. 6. 7. 8. 9. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 13 15 16 18 18 19 20
UNDERSTANDING THE TIME VALUE OF MONEY? .
THE IMPORTANT OF DISCOUNT FUTURE CASH FLOWS FACTORS OF CHOOSING A DISCOUNT RATE . . .
NET PRESENT VALUE AND INTERNAL RATE RETURN . 9.1 9.2 9.3 Definition of Net Present Value(NPV) . . . .. . . . . . . . . . . . . .
Definition of Internal Rate Return.(IRR). . Contradiction between NPV and IRR . . . . . . . . . . . . . . . .
10. CONCLUSION 11. REFERENCES
Page 1
PART ONE: QUESTION 1
1. INTRODUCTION What is the ultimate goal in a diversification strategy? Most investors must say “it is to Certainly, everyone knows
improve
QUESTION 1 a) Distinguish between systematic and unsystematic risk. as the only relevant risk and why? b) In the context of the Capital Asset Pricing Model how would you define beta? How are betas determined and where can they be obtained? limitations of betas? c) What information does beta give to a financial manager? What are the Which is often regarded
QUESTION 2 a) What is the time value of money? flows? b) What factors need to be taken into account when choosing an appropriate discount rate? c) What do you understand by the terms (i) “net present value” (NPV) and (ii) “internal rate of return” (IRR)? d) Compare and contrast the NPV and IRR. Why is it important to “discount” future cash
CONTENTS
PART ONE: QUESTION 1 1. INTRODUCTION . 2. RISK 2.1 2.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 4 5 6 6 7 7 8 10
Systematic Risk and Unsystematic Risk Why Systematic Risk is OftenRegarded?. . . . . . . . . . . . . . . . .
3. BETA (β) 3.1 3.2 3.3 3.4
Definition of Beta .
How to Determine Betas . Limitations of Betas .
Information Given to a Financial Manager. .. . . . . . . .
4. CONCLUSION
PART TWO: QUESTION 2 5. 6. 7. 8. 9. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 13 15 16 18 18 19 20
UNDERSTANDING THE TIME VALUE OF MONEY? .
THE IMPORTANT OF DISCOUNT FUTURE CASH FLOWS FACTORS OF CHOOSING A DISCOUNT RATE . . .
NET PRESENT VALUE AND INTERNAL RATE RETURN . 9.1 9.2 9.3 Definition of Net Present Value(NPV) . . . .. . . . . . . . . . . . . .
Definition of Internal Rate Return.(IRR). . Contradiction between NPV and IRR . . . . . . . . . . . . . . . .
10. CONCLUSION 11. REFERENCES
Page 1
PART ONE: QUESTION 1
1. INTRODUCTION What is the ultimate goal in a diversification strategy? Most investors must say “it is to Certainly, everyone knows
improve
References: Baker, Samuel L. (2000). "Perils of the Internal Rate of Return". Retrieved on January 12, 2007. Bettis, R.A. and V. Mahajian (1990). “Risk analysis in corporate performance measurement”, in R January-February 1964. Lintner, J. (1965). “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets”, Review of Economics and Statistics, 47:1, 13-37