University Finance, Risk and Uncertainty Individual Assignment

This document presents a comprehensive solution to a finance assignment, addressing key concepts such as company valuation, risk assessment, and investment appraisal. The solution delves into the application of the Price-to-Earnings (PE) ratio, Price to Book Ratio (PB Ratio), and other valuation metrics, providing an analysis of their strengths and limitations. It includes a comparative analysis of companies like Anglo American, Associated British Foods, and Astra-Zeneca, examining the factors influencing their PE ratios. Furthermore, the assignment solution clarifies the distinction between diversifiable and non-diversifiable risks, providing a detailed table outlining their characteristics and implications for investment decisions. The document uses examples and data to illustrate the concepts, making it a valuable resource for students studying finance and investment analysis.

Running head: QUESTION AND ANSWERS
Question and Answers
Name of the Student:
Name of the University:
Author Note:

2QUESTION AND ANSWERS
Table of Contents
Answer to Question 2:................................................................................................................3
Part B:.....................................................................................................................................3
Part C:.....................................................................................................................................4
Answer to Question 3:................................................................................................................6
Part C:.....................................................................................................................................6
References:.................................................................................................................................8

3QUESTION AND ANSWERS
Answer to Question 2:
Part B:
The valuation of a company share price can be done by a number of variables such as
PE ratio, PB ratio and other valuation metrics. These metrics provide for the relative
valuation of the company. The PE ratio can be defined as the Price of the shares divided by
the earnings of the shares. The price of the share is the current price which is trading at the
exchange, while the earnings can be the current or the estimated earnings in the next 12
months (Aljifri and Ahmad 2019).
Thus the company Burry PLC has a price to earnings ratio which is measured at 16,
while the company in the same industry have a price to earnings ratio of 12.5. This implies to
possibilities to an analyst the first being that the stock of the company is overvalued
compared to the peer companies, while the second being the investors believe the company to
provide higher growth in earnings in the future (Dergiades, Milas and Panagiotidis 2020).
Thus as based on the information which is provided above the stock of the company is
overvalued and the investors should sell the stock. Thus the price of the shares fall and the
Price to earnings ratio fall down to 12.5. On the other hand if the investors believe that the
company have potential to provide exceptional return or high growth return should hold on
the stock.
The limitation of this analysis is also prevalent and the price to earnings ratio cannot
be taken as a complete metric for valuation. This is because a company might also have
negative earnings hence the price to earnings ratio cannot be calculated. In its place a better
valuation metric is the price to sales ratio, since the sales revenue of a company cannot be
negative.

4QUESTION AND ANSWERS
Thus based only on the Price to earnings ratio the analyst can claim the stock to be
overvalued, which should be supplemented with other measures to get an accurate assessment
of the stock value (Nezlobin, Rajan and Reichelstein 2016).
Part C:
The three companies which have been taken for the purpose of valuation is Anglo
American, Associated Britain foods and Astra-Zeneca. The price earnings ratio for the three
companies along with their valuation is provided in figure below,

5QUESTION AND ANSWERS
Figure 1:
Source:
Thus in the first three figures the valuation of the company each year is done with the-
should be Price to earnings ratio with the price earnings which has been provided in the data
set. In the last figure the companies Price earnings ratio is being compared with the FTSE
100 Ratio and a valuation is judgement is provided (Rahman and Shamsuddin 2019).
The change in the price to earnings ratio of the company can be due to the following
reasons which is being provided in the points below,
 The expectation of the growth of the company tends to increase the price earnings
ratio, which is observed with the company Anglo American and the stock of
associated Britain foods. This is because since the investors expect that the company
would reinvest the earnings and thus would generate greater return for the
stakeholders.
 The accumulation of debt by a company increases the risk of the company making it
more risky for investors. Thus the share price of the company falls and thus the price
to earnings ratio is reduced.
 The expectation of the growth of earnings and growth in earnings have been observed
in the stock of Astra-Zeneca, which has led to the fall in the price earnings ratio.
Although the price of the shares have increased it has also been contributed with the
rise in earnings leading to a fall in price earnings ratio.

6QUESTION AND ANSWERS
 The stock price of Associated Britain has stayed relatively stable with the earnings of
the company being stable. Thus the investors have confidence in the fundamentals of
the company which has led to the Price Earnings ratio to be stable.
Answer to Question 3:
Part C:
The differences between diversifiable and non-diversifiable risk is highlighted in the
points below in the below table,
Diversifiable Risk Non-Diversifiable Risk
Diversifiable Risk is the risk which is
related to the particular asset.
Non-diversifiable risk is the risk which is
related to the entire asset class.
Diversifiable risk of an asset can be
removed by diversifying the portfolio.
Non-Diversifiable risk cannot be eliminated
by diversifying the portfolio.
This risk can be controlled or reduced by the
management of the company.
This risk is out of control of the
management and is not affected by the
decision of the management.
Some industries such as insurance industry, banking industry, alcohol and cigarette
industry are subject to high levels of non-diversifiable risk. This is due to the fact these
industries are subject to various government policy, social-economic factors, taxation laws
and many more such factors. This is not within the control of the companies within the
industry and hence are subject to high levels of non-diversifiable risk.

7QUESTION AND ANSWERS
The industries which belong to the consumer staples, consumer discretionary sector
are subject to diversifiable risk. The diversifiable risk means the companies in this industry
can reduce the risk with diversification of portfolio.

8QUESTION AND ANSWERS
References:
Aljifri, K. and Ahmad, H.I., 2019. Choosing Valuation Models in the UAE. In ICT for a
Better Life and a Better World (pp. 191-203). Springer, Cham.
Dergiades, T., Milas, C. and Panagiotidis, T., 2020. A mixed frequency approach for stock
returns and valuation ratios. Economics Letters, 187, p.108861.
Nezlobin, A., Rajan, M.V. and Reichelstein, S., 2016. Structural properties of the price-to-
earnings and price-to-book ratios. Review of Accounting Studies, 21(2), pp.438-472.
Rahman, M.L. and Shamsuddin, A., 2019. Investor sentiment and the price-earnings ratio in
the G7 stock markets. Pacific-Basin Finance Journal, 55, pp.46-62.