Ideally, Investment risk Is assessed by using beta; Beta is the overall risk In Investing n a large market?. Beta measures the correspondence between the value of the security and the market. Beta is used in calculation of interest rates for CAMP. Financially, every company has its own beta (risk) according to their risk assessment; whereas, the overall market has its beta of 1. 0. If the beta of a security is, more than 1. 0 It poses higher risk but better return on Investment and a beta lower than 1. 0 poses lower risk with lower return.
Thus, M&S bears more risk and requires greater return and greater cost for company to finance equity. Comprises of working backwards from market profit growth forecasts and current share prices to the equity risk premium?. Practically, this is inadequate for valuation of risk in shares. Divergently, risks that are unconnected to the market can be controlled by diversification of the shares’ portfolio; whereas, risks correlated with the market are uncontrollable. Factually, there are two types of risk associated with companies: systematic and unsystematic risks.
Systematic risks in company’s cash flows, which are unconnected and unspecific to the company. Conversely, unsystematic risks in company’s cash flow are associated with factors specific to the company. In evaluation of the accounts of Next Pl and Marks Spencer, the application of CAMP would render the following results: According to the Next Balance Sheet fore 2004 and 2005 there appears to be a dramatic increase in the shareholders funds. In 2004, funds stood at 155. 1 And in 2005, it was 272. 7 this is an increase of 75%.
Additionally, share capital decreased to 26. 1 from 26. 5 this was consequent to the buy back of shares. Goodwill valuation has decreased by E. Million from EWE. Million to в?31. Million, which is reflected in the revaluation reserves figure. The figures in consolidated cash flow statement of Next Pl represent a consistent and stable cash flow as the company debt has depreciated over the year 2004 and 005. This is reflected by the decrease in finance lease payment, which was El mm in 2004 and only Meme in 2005. Total net debt had reduced to IEEE. Million in 2005 in comparison to the 2004 figure at IEEE. Mm. There had been incredible recovery from negative figure of E. Million as a decrease in cash in 2004, contrasting with the increase in cash in 2004 at a positive figure of E. Million. On the other hand, the consolidated cash flow statement of M represents a constant and significant decrease in cash inflow, according to the figures 2004 there was an increase of cash inflow at IEEE. M, whereas in 2005, there was a decrease of in cash flow with a negative figure of -El 20. Mm.
Inadvertently, this is a -73% of decrease in cash inflow -73%) this is reflected by the extra expenditure in the acquisition of subsidiaries (extra cost of El 25. Mm) and dramatic reduction in management of finances (2004= IEEE. Mom, 2005=negative -El ,507. Mm). Over the year, Next Pl faced unprecedented reduction of (250. 8/306. 9-1= 18. 3%) in its net debt. In 2004 Next was geared at 227. 4% (352. 7/1 55. 1*100) but 2005 its’ gearing drastically dropped to 128% (349. 3/272. 7* 100) making an intensive event in the market by representing lesser risk for its shareholders and potential investors.
Comparatively, Marks & Spencer (M&S) had faced an intensive it stood at E,099. Mom this is an inflation of this is likely to be related to the incurred acquisition cost of peruse costing El 25. Mm and tender offer expenses of EWE. Mm. With reference to gearing, M&S gearing in 2004 was and currently 2005 stands at (El this dramatic increase in gearing renders M&S in an intensively volatile position in the market, resulting in greater return expectations from shareholders for taking excessive risks.
The Dividend Valuation Model: Dividends Valuation Model is calculated by using the expected dividend for the coming year; this can be estimated by evaluating the ex-dividend say over 4 years in order to estimate the forthcoming dividend. Subsequently, this figure is multiplied by (1+ expected future growth rate of return) then divided by (shareholders’ required rate of return subtract expected future growth rate of return). This is also known as the Gordon Growth Model. Conversely, some models calculate dividends yield by taking the total dividends paid per share over the course of a year and dividing by he share price?.
As an example, if a share trades at IPPP with a dividend of app over a year this will render a dividend yield of 11 . 1%. The Gordon Growth Model Formula: Whereas: POP–represents current ex-dividend market price of the share r– represents shareholders’ required rate of return g– represents expected future growth rate of dividends Del– represents declared dividend at time TTL n– represents number of years the share is held for. Having evaluated the accounts of Next Pl, following are the dividend payments respectively from 2002, 2003, 2004 and 2005: 27.
Inadvertently, a higher PEE signifies a reluctance from prospective shareholders as the hare of a company’s profits will cost more than others with lower PEE. Nonetheless, the underlining doctrine for a higher PEE is the reflected earning growth is faster than expected and possibly at a lower risk earning. Commonly, PEE is more regularly used by vast range of investors than earning yield. On the contrary, earning yield is relatively more consistent with methods such as dividend yield, bond yields and interest rates.
