Financial Management
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Part 1
The stock’s beta has driven implications for every stock (Mitra & Khanna, 2014). It should be noticed that every stock has a beta of lesser than one and that the beta is expressing the basic tradeoff between reducing risks and increasing returns. If the stock market goes up to 10 percent today, then we can expect the stock to be volatile. For instance, if the stock of the two companies goes up to 10 percent, then the spreadsheet can be referred for knowing the impact of beta.
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2014 Stock of the First Company
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Beta
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0.29
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10 percent increase
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0.1
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0.029
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0.319
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0.56480
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New Stock Beta
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1
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2014 Stock of the Second Company
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Beta
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0.95
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10% increase
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0.1
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0.095
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1.045
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1.02225
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New Stock Beta
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2
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The stock whose beta is greater than one will have more standard deviation than the market (Wiedmann & Heckemüller, 2003). Similarly, the stock whose beta is lesser than one will have a smaller standard deviation than the market (2014). We are aware of the fact that the stock with beta leser than 1 cannot move as efficiently as is the requirement of the market. Furthermore, they are not volatile and remain stable. The stock market return of 10 percent will increase the risks which are associated with the stock gains for the firm. With the help of Capital Asset Pricing Model (CAPM), we can easily estimate the cost of equity capital which allows businesses to determine the best way to raise funds while reducing the total cost of capital.
Part 2