Week6: Beta & 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.
Author: Ravi Nelagundarasi
Beta
Beta is associated with an investment. The beta of an investment is its volatility about the market’s volatility at a given point in time. It indicates the volatility of returns associated with an investment. It is an indication and measure of the amount of risk to be associated with a stock, for instance, the higher the company’s beta score, the higher the risk associated with such an investment yet, the higher the potential returns from the investment. A beta of 1 is equal to the market’s volatility at such a time. Management and investor have to therefore choose between high yield with high risk and low risk with the relatively lower outcome. This means Walmart has the lowest rate of risk among its competitor but also means the return is relatively lower compared to the competitor. Amazon gives the highest return at 132% of the market value but deals with the highest risk as well. That means for an investor looking for safety, Walmart is the best investment while for those looking for higher returns despite the higher risk, then Amazon is the best investment (McClure, 2020).
Capital Budgeting
Net Present Value (NPV) is the difference between present cash inflows and outflow over a given period while the Internal Rate of Return (IRR) is to estimate the probability of potential investments. While both a good capital budgeting technique, NPV has an advantage over IRR when it comes to projects with high cash outflow especially at the end which could lead to multiple IRRs hence making the NPV method better. It also employs realistic investment rate assumptions and better probability indication. It is relative to the size of the company. Yes, it is ethical for small private entities to ultimately focus on profit maximization for their shareholders. However, it is highly unethical for bigger public companies to focus on shareholders rather than stakeholders. The business has a responsibility to all its stakeholders who include more than the shareholders alone. Such a focus on shareholders cold tamper with the company’s policies, strategies, and even innovation. More ethical companies tend to have higher satisfaction among their stakeholders. That translates to better relationships and trust. While that may not directly translate to better capital cost, such relationships could influence lenders, investors, and even governments in the benefit of such companies compared to unethical companies that risk higher dissatisfaction, possible lawsuits among other hindrances (Sepe, Smarra, & Sorrentino, 2015).