BUSINESS FINANCE.

BUSINESS FINANCE
STUDENT ID:
[Pick the date]

a) The objective of the given report is to offer advice to investors of Tri-Star Management in
relation to the potential risk associated with the selected stocks on which forecasts have
been presented. Additionally, the report aims to provide investment recommendations to
client on the basis of the current pricing of the selected company stocks considering their
likely future performance.
(i) Comparison of Risk
If an investor has a well diversified portfolio, then it is assumed that only systematic risk is
present and is traditionally captured using beta. This is a relative measure of risk which uses
market index as the base. Amongst the selected stocks, there are three companies from the
banking industry namely NAB (National Australia Bank), WBC (Westpac Banking
Corporation) & ANZ which tend to have similar beta values of 1.03, 1.22 and 1.17
respectively. These are big banks and the performance of the sector is essentially dependent
on the growth of Australian economy. As a result, the beta of these companies is close to 1
only. Further, going forward, the key faced by these two banks would be on account of any
slowdown in Australian economy along with crash in the housing market (Petty et. al., 2016).
Another selected company is Qantas which is the biggest airline based on Australia. The beta
for this company is 1.8 which reflects that the business is risky in comparison with banks and
market in general. This is true considering the extent of competition in the airline industry.
Also, the profitability of business operations is significantly influenced by the price of fuel
which tends to vary a lot owing to which the stock price fluctuates significantly. Going
forward, highly fuel prices may lead to erosion of profitability (Parrino and Kidwell, 2014).
Yet another company is AGL Energy which is into generation of power along with
distribution of electricity and gas. Considering the nature of the business, the risk is
comparatively lower which is also reflected in the beta of the company which is only 0.73.
The company is mainly subjected to regulatory risk on account of change in government
policy (Ross et. al., 2015).
(ii) Overpriced or Underpriced
In order to determine whether the stock is overpriced or underpriced, a comparison between
the required return and actual returns based on the forecast has been done. If the required
return of the stock exceeds the actual returns, then it would imply that the stock is overpriced
and it would have to become lower in price to ensure that expected returns are met (Watson
and Head, 2015). On the contrary, if the required return of the stock is less than the actual