BUSINESS FINANCE

Business Finance

[Instructor's name]Business Finance

Question 1 (a)

The current Beta value of Rio Tinto (ASX code: RIO) is 1.47 (www.asx.com.au), which shows that Rio Tinto's rate of return is a bit higher than the market, but at the same time it also depicts a higher risk. If the market will increase next year by 10 percent then the rate of return provided will also be increased by 10 percent. Moreover, the risk associated with market securities of Rio Tinto will also increase by 10 percent.

The current Beta value of Wesfarmers (ASX code: WES) is 1.01 (www.infomine.com). This beta value indicates that the Wesfarmers' price of securities will move along the market movement. Any changes in the market sensitivity will also affects the beta of Wesfarmers' market securities beta value. If next year, the market recover by 10 percent then the rate of return of Wesfarmers; market securities will also increase by 10 percent, but at the same time risk associated with Wesfarmers; market securities will also increase by 10 percent.

Investment Decision

Since Beta is the measure of systematic risk and volatility of a market security in contrast to the market as a whole. If beta of market security is less than 1, it indicates that the market security will be less volatile in relation to the market. If beta of a security is equal to 1, then the market security price will move along with the market. If beta value of a market security is more than 1, then its price will be more volatile than the market as a whole.

If we invest in Rio Tinto and the market moves upwards, we will earn a higher amount in comparison to the market. But at the same time a higher risk is also involved, as any downward movement in the market will result in magnified decrease in earnings. On the other hand, investing in Wesfarmers will also result in higher earning and higher risk than market, but in comparison to Rio Tinto it is small.

As it is expected that the market will recover by 10 percent next year, investing in Rio Tinto is beneficial for the investors. Because when the market will recover next year the return from Rio Tinto's market securities will increased by 10 percent and ultimately the earnings of investor will be increased by 10 percent.

Question 1 (b)

According to a press release, Macquarie Group Ltd. will face steep fall in its earrings for 2012. Over the last 12 months, the company has also cut down almost 1,300 jobs. The company has also announced to buy back its shares up to 10 percent (Waters, 2012).

The news was very well anticipated in the market. Due to the announcement of shares repurchase, the share price of the company has increased in the market.

According to the latest Australian Industry Group-PWC index, due to the pressure of higher dollar the index fell down 5.6 points (Stafford and Waters, 2012).

Due to this news, the manufacturing activity in the industry is largely affected. Employment, new orders, and production ...