Homework Set #3

Name: Mireya Tifre

Title of Assignment: Homework Set 3: Chapters 6, 7, and 8

Professor: Michael D. Schnur

Course: FIN 534-Financial Management

Due Date: 15 May 2017:

A. Using the two stocks you selected from Homework #1, identify the Beta for each stock. In your own words, what conclusion can you draw from the stocks’ current and historical beta? If the stock market went up 10% today, what would be the impact on each of your stocks?

Equation: Beta = Covariance / Variance

Equation: Beta = Covariance/ Variance = 0.6553

Coca Cola (KO) Beta as of 30th April 2017= 0.6553

As of 30th April 2017, the calculated current Beta or financial elasticity for Coca-Cola is at 0.6553. In making an interpretation of it, this indicates that it is 0.65 % less volatile as the overall market. Since Coca-Cola’s beta is below 1.0 then we can interpret that their stock tends to be less volatile than the underlining index. If the market went up 10% today on an investment, then Coca-Colas’ will be expected to gain 6.5% (10 X 0.6553). based on their beta “it implies the stock prices will move with the overall market, however, the stock prices will remain less risky and volatile” ("CAPM Beta - Definition, Formula, Calculate Beta in Excel", 2017)

Coca-Cola Historical Beta Data

STRABUCKS (SBUX)

Variance as of 30th April 2017= 0.7601

As of 30th April 2017, the calculated current Beta or financial elasticity for Starbucks (SBUX) is reported as 0.7601. In making an interpretation of it, this indicates that it is 0.7601% less volatile as the overall market. Since Starbuck’s beta is below 1.0 then we can interpret that their stock tends to be less volatile than the underlining index in the S&P 500. If the market went up 10% today on an investment, then Coca-Colas’ will be expected to gain 7.6% (10 X 0.7601).

Starbucks Historical Beta (24 Months) Data

B. Using the 2014 financial statements from your stocks above and the equations from your textbook, prepare the Historical Average and Standard Deviation for each stock.

Coca-Cola’s Historical Average Return (5 Years) as reported by ("Stocks Performance Guide", 2017)

3.62 +13.96+2.20+1.75 +(-3.49) = 18.04 % / 5 = 6.01%

Starbucks’ Historical Average Return (5 Years) as per ("Stocks Performance Guide", 2017).

(16.56 + 46.17 + 4.67 + 46.33 + [-7.51]) = 106.22% / 5 = 35.41 %

Coca Cola (KO) Standard Deviation as per ("Coca-Cola Co. (KO) | CAPM", 2017)

Standard Deviation Calculated at 4.03%

Starbuck (SBUX) Standard Deviation as per ("Starbucks Corp. (SBUX) | CAPM", 2017)

Standard Deviation Calculated at: 5.56%

Both stocks; Coca Cola’s SD of 4.03 % and Starbucks’ SD at 5.56 % are indicative of their volatility. The set of data was calculated using set of data from 2010 till 2016 fiscal year.

Reference:

Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management (15th ed.). Mason, OH: South-Western Cengage Learning.