Business riskâ€¯is typically described as the exposure aâ€¯companyâ€¯or organization has to a number of factors that may lower the companyâ€™s profits, which may trigger a business failure.â€¯Although there are many business risks, two major risk categories are systematic risks and unsystematic risks.
Respond to the following in a minimum of 175 words:
- Explain the differences between systematic risks and unsystematic risks.
- Briefly discuss two sources of systematic risks and two sources of unsystematic risks.
Purpose of Assignment
The purpose of this assignment is to allow the student an opportunity to calculate the rate of return of equity and debt instruments. It allows the student to understand the effects of dividends; capital gains; inflation rates; and how the nominal rate of return affects valuation and pricing. The assignment also allows the student to apply concepts related to CAPM, WACC, and Flotation Costs to understand the influence of debt and equity on the company’s capital structure.
VERY IMPORTANT – TWO SUBMISSIONS ARE REQUIRED FOR THIS ASSIGNMENT
STEP 1 – (Submit as an Excel spreadsheet)
Calculate the following problems using Microsoft Excel. The calculations must be done in Excel. You must show your work. If you submit these in Word, you will not receive credit. If you do not show your work, you will not receive credit. Examples are provided above for review prior to starting this assignment. FOLLOW MY EXAMPLES!
1. Stock Valuation: A stock has an initial price of $125 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $180. Compute the percentage total return, capital gains yield, and dividend yield.
2. Total Return: You bought a share of 10% preferred stock for $100 last year. The market price for your stock is now $120. What was your total return for last year?
3. CAPM: A stock has a beta of 1.20, the expected market rate of return is 20%, and a risk-free rate of 5 percent. What is the expected rate of return of the stock?
4. WACC: The Corporation has a targeted capital structure of 80% common stock and 20% debt. The cost of equity is 10% and the cost of debt is 5%. The tax rate is 30%. What is the company’s weighted average cost of capital (WACC)?
5. Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a new plant that will cost $525 million to build. When the company issues new equity, it incurs a flotation cost of 15%. The flotation cost on new debt is 8%. What is the initial cost of the plant if the company raises all equity externally?
STEP 2 – (Submit as a WORD document in APA format)
Provide an overall summary of how companies make financial decisions based on Stock Valuation, Total Return, CAPM, WACC and Flotation Costs. This is a general discussion on these terms. Do not include your calculations within the discussion. Your outline for your paper should look similar to the following:
- Stock Valuation
- Total Return
- Flotation Costs
Each point above should be a paragraph containing 4-5 sentences, with the exception of the references page. There are required references for each assignment. Those are given to you below. So, all you need to do is copy, paste and then proceed to double-space, alphabetize and format into a hanging indent. You should not need to use other references. But if you do, format those using the Reference and Citation Generator Tool (see link below).
Minimum required references include your textbook (see below).
Ross, S., Westerfield, R., Jaffe, J. & Jordan, B. (2016). Corporate finance (11th edition). New York, N.Y. McGraw-Hill Education.