CAPM

CAPM and Sources for Capital Module 3 - SLP

Module 3 - SLP: CAPM and Sources for Capital

Part I

This report aims at finding out the intrinsic value of a company, for which we chose Wal-Mart as our selected organization. Wal-Mart is a successful chain of stores that has marked its presence in the international world on a large scale. Wal-Mart is a recognized and renowned retailer, so we can easily access its data on the website www.finance.yahoo.com. From which retrieved the historical data for the last five years. Beta coefficient (ß) is a measure of the volatility of an asset (a stock or a value) on the variability of the market, so that higher values ??denote more volatility and Beta. Beta 1.0 is equivalent to the market. The difference between the Beta (ß) of an action or value and 1.0 is expressed as a percentage of volatility (Harvey, 2002). A Beta value 1.75 is 75% more volatile than the market. Similarly, a 0.7 Beta value would be 30% less volatile than the market.

Beta Coefficient is a measure of systematic risk associated with a single action or a portfolio of stocks. The systematic risk is measured with respect to the market. In most cases, the market of reference is the index of securities S & P 500. The coefficient beta of a value is calculated as the covariance of the excess return on the value and the excess return on the market divided by the variance of excess return s on the market. The excess return is the difference between the yield on the action (or market) and the yield on risk-free rate (Aswath, 2007). Using the following equation for Capital asset Pricing Model, we can find out the beta coefficient for the given organization, Wal-Mart.

CAPM is Ri = rf+ Beta (Rm - rf)

If the risk-free return (Rf) is 5%, and the risk premium (Rm) is 12%, and the required return using CAPM for similar industry is found to be 18.3% then our beta coefficient will be:

18.3%= 5% + Beta (12%-5%)

Beta (7%) = 18.3% - 5%

Beta = 13.3%

7%

Beta = 1.9

Where,

Ri is the expected rate of return,

Rf is the risk-free rate of return,

(Rm-Rf) is the market rate of return.

I believe that Wal-Mart represents a substantial investment because although the company's return on equity is within the industry average, Wal-Mart seems to be a less risky investment, this is supported by a lower Beta coefficient of 0.05, and the high Price Earnings ratios as well as the company's expected growth rate (10.10%) are an indication of the company's strength. Investors have faith in the company's management and operations which is reflected in the Price Earnings ratio (Aswath, 2007). I also believe that the expected growth rate is easily achievable by a company such as Wal-Mart, and this is evidenced by the percentage change in Earnings per share from 2006 to 2007 (15.54%) which is coupled with a 7.52% percentage increase in the Return on Equity over the same ...