Calculation of required rate of return on Oricon and Newcrest

This document discusses the calculation of the required rate of return on Oricon and Newcrest, using the capital asset pricing model. It also explains the valuation of equity using the dividend discount model and analyzes the performance of Orica and Newcrest based on their share prices. The document highlights the risks and returns associated with investing in these firms.

ACCOUNTS AND FINANCE

TABLE OF CONTENTS
Calculation of required rate of return on Oricon and Newcrest...............................................................3
Valuation using dividend model..............................................................................................................3
Performance of Orica and Newcrest........................................................................................................4
REFERENCES............................................................................................................................................7

Calculation of required rate of return on Oricon and Newcrest
In the current time period more and more investors are attracted towards the investment
avenues from which huge amount of return can be earned by the business firms. There are
number of investment areas like equity and commodity from which huge amount of return can be
earned by the investors. While making investment in any security it is necessary to obtain
information about the risks that are associated with the specific project. It is very important to
earn return according to the risk that are associated with the specific security. CAPM is the
model that reflects the return that is required for the specific amount of risk that is taken on the
investment (Bollen, Mao and Zeng, 2011). One can take wise decisions on the basis of value
that is computed by using CAPM or capital asset pricing model. If required rate of return is high
but it is not possible to achieve same return on investment then one can take decision not to make
investment in specific security. In order to make accurate decision one can calculate past year
returns and can take average of same. On that basis it can be determined whether it is possible to
obtain required rate of return if investment is made in the specific security. In order to implement
capital asset pricing model one need specific inputs. These inputs are risk free rate of return, beta
and market return. All these variables are taken in to consideration in order to compute minimum
rate of return that is required on the specific project. It can be identified that beta of the Newcrest
is -0.03 is which means that index and stock price movement are inversely associated with each
other. This means that if value of index will increase then share price will reduced sharply.
Similarly, beta value in case of Orica is 0.65 which reflects that both index and stock price are
positively correlated to each other. There is a moderate relationship between index and stock
price. It can be said that when index changed by 10% then moderate change will come in the
share price. It can be said that both firms shares relationship with the index are different and
thus, investor must cautiously make investment in both firm shares.
Valuation using dividend model
Dividend discount model is the one of the main model that is used for the equity valuation.
Under this model an investor take in to consideration dividend per share that is given by the firm
to the shareholders. Apart from this discount factor and dividend growth rate is also taken in to
consideration for valuation of equity. Under this first of all value of dividend per share is
computed and under this dividend entire value is divided by the number of shares issued by the

firm to the shareholders. Thereafter, dividend per share is divided by the discount rate and from
same dividend growth rate is subtracted in order to do valuation of equity. It can be observed that
fair value of the shares is computed at 0.032 in case of Orica. On other hand, in case of Newcrest
fair value of shares is 0.29. It can be said on the basis of this method that shares are not fairly
valued. Shares of both firms are overvalued in the market and one must abstain from making
investment in both. This is because same are not fairly valued in the stock market. If one is
purchasing shares at the current price then it means that same is paying more and such kind of
investment deal cannot be assumed profitable by the business firm (Van Rooij, Lusardi and
Alessie, 2011). Hence, it will not be wise decision to purchase shares of the both named firms.
There are some limitations of the dividend discount method and due to this reason facts that are
produced by the model may be considered unreliable. It must be noted that in the dividend
discount model cash flows that may be generated in the business in the future time period is not
taken in to consideration. Only dividend is taken in to account in the calculation process.
Interesting fact is that business firms every year does not declare dividend on its shares.
Moreover, investors take investment decisions by taken in to account by considering firm cash
flows that happened in the different quarters (Edmans, 2011). Thus, true fair value is not
reflected by the dividend discount mode. Due to this reasons results generated by dividend
discount model cannot be assumed profitable by the business firm.
Performance of Orica and Newcrest
Figure 1Performance of Newcrest share price

Figure 1Performnace of Orica share price
Interpretation
In case of Newcrest it can be observed that cash flows are changing consistently. It can
be seen that return percentage is changing at pace in case of the mentioned business firm.
Interesting fact is that on some dates stock price increased at rapid pace but on some dates its
price declined at sharp rate. Thus, it can be said that mentioned firm stock is highly volatile in
nature. On this basis it can be said that investment must be made in the Newcrest after
considering number of factors. Same trend can be observed in case of Orica as it can be seen that
return is changing consistently and in most days it remain negative. However, at end time period
some positive changes comes in the Oricon shares and it can be observed that return of 15% was
generated by the index. Thereafter, return on Oricon reduced to 1%. It can be seen from the
diagram that on average basis return of 2-6% is earned if share price move upward in comparison
to previous day closing price. There are lots of things that need to done while making investment
in any security. If both firms are compared to each other then in that case it can be said that it
will be better to make investment in the Newcrest because in case of the mentioned firm most of
times positive return are observed. Whereas, in case of latter firm fifty percent times it is
observed that share price declined in comparison to the previous time period. Thus, it will be
better to make investment in the Newcrest relative to Orica. It can be observed that both shares

are fluctuating at sharp rate which means that it is very risky to make investment in both
securities. However, it risk is high then good amount of return can be expected on the Newcrest.

REFERENCES
Books and journals
Bollen, J., Mao, H. and Zeng, X., 2011. Twitter mood predicts the stock market. Journal of
computational science. 2(1). pp.1-8.
Edmans, A., 2011. Does the stock market fully value intangibles? Employee satisfaction and
equity prices. Journal of Financial Economics, 101(3), pp.621-640.
Van Rooij, M., Lusardi, A. and Alessie, R., 2011. Financial literacy and stock market
participation. Journal of Financial Economics. 101(2). pp.449-472.