Financial Queries and Investment Proposals: A Comprehensive Analysis

BUSINESS FINANCE
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Table of Contents
1.0 Introduction.....................................................................................................................................3
2.0 Discussion/Workings.......................................................................................................................3
2.1 Capital Asset Pricing Model.........................................................................................................3
2.2 Concepts of Market Efficiency.....................................................................................................3
2.3 Assumption of General Dividend Valuation Model......................................................................4
2.4 NPV as a Capital Budgeting Tool..................................................................................................4
2.4.1 Evaluation of Investment......................................................................................................4
2.4.2 Computation of WACC..........................................................................................................5
2.4.3 Evaluation of Projects...........................................................................................................6
3.0 Conclusion.......................................................................................................................................7
4.0 References.......................................................................................................................................7

1.0 Introduction
The objective of this report is to provide responses to the various financial queries raised by
the client. Additionally advice needs to be given to the client with regards to various
investment proposals that the client is currently evaluating. The same is based on various
financial tools and techniques. A key limitation of the report is that the analysis of the various
investment decisions to be made by the client have been made on the available data. This
available data is historical data and also the models used in analysis are based on various
assumptions which are assumed to be true for the given analysis.
2.0 Discussion/Workings
The discussion with regards to financial questions of client is carried out below.
2.1 Capital Asset Pricing Model
Capital Asset Pricing Model is a model which is used to highlight the relationship between
risk and return. In the process, it can be used to determine the expected returns of a stock
based on the underlying risk which is measured through beta. The relevant mathematical
expression for this model is shown as follows (Berk et. al., 2016).
Expected returns = Risk free rate + Beta* Market Risk Premium
In order to compute the expected returns, it starts with the risk free rate and then provides a
premium for assumption of risk to the investor based on the beta of the stock. A higher beta
value would imply higher risk and higher expected returns (Damodaran, 2015).
2.2 Concepts of Market Efficiency
The concept of efficient capital markets implies that markets are efficient with regards to
representing all public and private information in the price of the underlying security. As a
result, the investors cannot beat the market on a consistent basis through the use of
fundamental or technical analysis. In an efficient market, there is no information asymmetry
and prices tend to adjust quickly to the new information that enters the market(Lasher, 2017).
From the perspective of financial managers, efficient markets are significant as in such
markets, the impact of various managerial decisions are accurately and spontaneously
reflected in the price. As a result, the prices do not tend to deviate from the fair prices for an
extended time (Ross et. al., 2015).