Week 6 Discussion: Beta and Capital Budgeting

RESPONSE FOR THE DISCUSSION:

In your response to your classmates, consider comparing cash generation techniques at your company versus his or her company. Draw distinctions based on the industry and tell your colleagues why those distinctions are necessary for the management of cash flow. Below are additional suggestions on how to respond to your classmates’ discussions:

· Ask a probing question, substantiated with additional background information, evidence or research.

· Share an insight from having read your colleagues’ postings, synthesizing the information to provide new perspectives.

· Offer and support an alternative perspective using readings from the classroom or from your own research.

· Validate an idea with your own experience and additional research.

· Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings.

· Expand on your colleagues’ postings by providing additional insights or contrasting perspectives based on readings and evidence.

Discussion_

Author:  by Shiva Thati  

Beta and Capital Budgeting 

The beta of a company basically determines an organization’s volatility, risk, or financial security as compared to the competitive market. It also monitors a company’s equity value in the market. The Beta value is essentially The Capital Asset Pricing Model (CAPM) and helps determine the return of an asset. My group project was based on Microsoft Inc. and its 3Y monthly Beta value is 0.97. Apple Inc. on the other hand has a Beta of 1.06 which is a similar kind of industry (Sibbertsen, 2019). Considering that a Beta value determines the value and return of the assets of a company, it makes the Beta value very critical to consider. The volatility of a stock tells us how much stable a company’s financial health is! Depending on the volatility of a company’s stock, investors and analysts determines the risks and makes appropriate steps to make the decisions. Depending on the risks, analysts determine how much return could be obtained from the financial assets (Olanrewaju, 2017).

Capital Budgeting is basically the process of evaluating and selecting long-term investments that are focused on increasing the wealth of stakeholders. There are several criteria that analysts look into for example the diversification or modernization; cash flow evaluations and evaluation of the rate of return etc. and looks into searching routes on how the overall profits for the stakeholders could be maximized. In my opinion, the overall rate of return is way more important than the net present value. The net present value of course illustrates the value of a company’s assets but on the other side, the higher rate of return reflects the financial and future health of a company. In my opinion, companies should often work towards increasing the wealth of stakeholders as an organization cannot run without investments. Eventually, the goal of any investment is to expect high returns. Ethics is a quality that makes the health of an organization stronger as it strengthens the organizational culture (Abor, 2017).

 

References:

Abor, J. Y. (2017). Evaluating Capital Investment Decisions: Capital Budgeting. In Entrepreneurial Finance for MSMEs (pp. 293-320). Palgrave Macmillan, Cham.

Becker, J., Hollstein, F., Prokopczuk, M., & Sibbertsen, P. (2019). The memory of beta. Available at SSRN 3492931.

Oseni, E., & Olanrewaju, R. O. (2017). A Capital Asset Pricing Model’s (CAPM’s) Beta Estimation in the Presence of Normality and Non-normality Assumptions. International Journal of Finance and Banking Research, 3(3), 44.