Risk and Capital Essay

709 WordsFeb 7, 20133 Pages
Risk and Capital American Intercontinental University June 24, 2012 Any uncertainty that a business environment faces is known as a business risk. Risk management is used by companies and businesses to evaluate any problems that may exist or will come about. After the risk occurs, the business may then take all of the necessary steps to reduce the risk or remove it completely. Risk management provides a way to protect a company’s public face. Capital is known as the right-hand side of the balance sheet. It can be seen as the main sum of liability and equity. Cost of capital is the cost of financing a company's operations or assets. Cost of capital is the bare minimum rate of return that a company's owners call for. If the minimum rate is not accomplished by a firm, the owners will then divest all of their money and invest elsewhere. This action will drive that company's stock price down and place the future of the company at an even bigger risk. With the information that was given I found out through calculation that the estimate of the risk-free rate of interest is 2.625%. XYZ's beta (ß) = 1.64 XYZ's current annual dividend = $0.8 XYZ's 3-year dividend growth rate (g) = 8.2% Industry P/E = 23.2 XYZ's EPS. = $4.87 Under CAPM: Ks = KRF + (market Risk Premium) Ks =2.625 + 1.64(7.5) = 14.93% When the Current Annual Dividend (D0) is = $0.8, and the Growth Rate is 8.2%, then the expected stock dividend (D1) would = $0.8*1.082 = $0.8656 then the Po = $12.87 If the stock price equals $76.28, this would then make a difference of $63.41 among the stock price that was calculated above and the then current stock price for (January). The dissimilarities come from many different explanations such as the following: 1) If we assume that the market risk premium was 7.5%, then the answer to the question can’t be true. This is because the

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