Module 1 – SLP- Present Value and the Risk/Return Trade-Off

TRIDENT UNIVERSITY
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Module 1 – SLP- Present Value and the Risk/Return Trade-Off
FIN501
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1 Give a brief description of the company and why you find it interesting.
Microsoft is a US based technology company that develops technological devices (hardware) and operating systems, for computers, tablets (Surface) and game consoles (Xbox). Microsoft is interesting as the company has managed to provide solutions to customers with various technology products and more than four decades are the company started there is still emphasis on innovation, quality service and quality products. The company is mostly associated with the Windows system, the most common computer operating system, but there are other products. The company is among one of the most prosperous companies in the US and the world since it was founded in 1975 by William H. Gates III and Paul Allen.
Internet sector
2 What is the beta of this company’s stock? Based on the magnitude of the beta, do you think it is low risk, high risk, or somewhere in between?
According to Zacks.com (2019), the company’s beta as at Dec 31 2018 was 1.238, having increased gradually from 2015. As beta increases the risk increases.
Microsoft

Date

Beta

Risk

Dec 31 2014

1.009

High

Dec 31 2015

0.92

Low

Dec 31 2016

1.079

High

Dec 31 2017

1.061

High

Dec 31 2018

1.238

High

3 Now look at recent stock price movements. What is the highest price the stock has been over the last year? The lowest price over the last year? Look at the five-year pattern as well. Based on what you see, what does this tell you about the riskiness of the stock?
In the past year the highest stock price was $ 141.34 on 7/26/2019 while the lowest price over the last year was $94.13 on 12/24/2018 (Yahoo Finance, 2019). While tech stocks are volatile, Microsoft is a stable company and the company’s beta is close to 1 in the last five years meaning that there is low risk that the price will change suddenly unless under unexpected conditions. Beta is a measure of relevant risk and it is also the risk that remains after diversification and stocks with a high standard deviation also have a high beta unlike Microsoft’s stock. Investors seeking quick gins have increasingly focused on tech stocks without understanding the companies’ fundamentals, yet if there is a slowdown in the tech industry there is likely to be drastic change in the stock price and tech investments. There is clarity on value creation for Microsoft unlike some of the tech companies and even when there are market changes Microsoft remains a resilient company.
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