Question 1
Investment is an undertaking with an expected return in a given period of time. Investors focus on the value of return before making an investment decision. The investment value is subject to some elements which investors are concerned with their investments. These variables are as follows:
The expected cash flow of investment.
The investment cash flow can be used to evaluate the investment viability through use discounting techniques such as Net Present Value, Internal Rate of Return and Profitability Index. When the initial project outlay is less than the present value of the investment cash flows, then the project is viable using NPV technique. The firm’s rate of return is compared with the IRR rate when making an investment decision using IRR technique. When IRR rate is greater than the firm’s expected rate of return, then the investment is viable.
Financial risks facing investment
The level of risks that are expected after making an investment decision need be evaluated. The risks have a negative impact on the expected value of the investment after the lapse of the given period. The financial risks influence the cash flow realized by the investment. The investor should put more emphasis on these risks since the investment can be viable when evaluated using the discounting methods but risks can lead to unexpected returns. Standard deviation is used to evaluate the portfolio risk level. These financial risks include; market risks, operational risks, liquidity risks as well as credit risks.
Competitive advantage of the organization.
Every organization faces competing forces in the market system. The organizational competitive power influences the firm’s market share and performance. A strong competitive power results to high returns to the investments made in the organization. The investor should evaluate the organizational competitive power before making any investment decision.
Question 2
Dr Pepper Snapple Group Inc shows a growth in dividend per share of 0.05%. This is an indication that there is an improvement in the performance of the organization. There is a possibility of high returns on the investment made by an investor. The performance of the firm in the market share is also increasing thus sustainability chances of the firm are high. As an investor, it is viable to invest in the firm since there are chances of high returns in the near future.
The current ratio and quick ratio show that the firm has almost equal current assets and current liabilities. This is an indication that the firm is able to meet its short term maturing obligation when they fall due. The firm's liquidity position is low thus a sustainable performance in the future. As an investor, it is profitable to invest in the organization since the investment will not be affected by liquidity risks.
The capital structure of the firm shows that half of the firm's operation is financed by debt. This is an indication that the value of the firm is high thus the value of investments. Although there is a repayment amount of the debt, the firm is able to remain in operation using the available equity funds.
Dr Pepper Snapple Group Inc has shown an improved performance as shown in the increased sales growth of 19.02 percent as compared to the previous year. This is an indication that the firm’s market share is rising showing the chances of high returns to the investment made. An investor can use this variable to base his investment decision.
