Purchase Solution

Company Financial Analysis: Risk and Return

Not what you're looking for?

Ask Custom Question

Treasury Bill rate: 0.34 Market Yield: 8%

HOME DEPOT
BETA: 0.87
0.34 + [ 0.87 x (0.08 - 0.34)]
0.34 + [ 0.87 x (-0.26)]
0.34 + [-0.226]
Kj= 0.1138

DISNEY
BETA: 1.31
0.34 + [1.31 x (0.08 - 0.34)]
0.34 + [1.31 x (-0.26)]
0.34 + [-0.341]
Kj= -0.001

Given the information provided by these two companies, Identify which company has the greater risk and the greater return. Is the risk consistent with the return for each company? By looking at each company's operations and their type of industry comment if the level of risk is justified for each company.

Purchase this Solution

Solution Summary

This solution compares two companies in terms of risk and return.

Solution Preview

The company with the higher beta has the greater risk. This is because beta measures market risk, which is the risk that cannot be diversified. Therefore, Disney is riskier with beta value of 1.31 than Home Depot whose beta value is 0.87.

With regards to the Capital Asset Pricing Model (CAPM), the Kj in the calculation above is the required rate of return. Thus, Home Depot has greater required rate of return than Disney. This is interesting because higher risks usually go together with higher return. However, in this case it is the opposite. Though Disney is more risky than ...

Purchase this Solution


Free BrainMass Quizzes
Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.