Question one
E[r] =SkP(s)rk
Where E[r]= is the expected return,
FOR (A) P (k) =probability that the rate (rs) occurs, (A) = (0.3, 0.4, 0.3,) FOR (B) = (0.2, 0.3, 0.3, 0.2)
Rk = the return at s level FOR (A) =11%, 15%, 19% FOR (B) =--5%,6%,14%,22%
For (B) = 0.3*11 %+( 0.4*15) + (0.3*19) =11.733%
For (A) = (0.2*-5%) + (0.3*6%) + (0.3*14%) + (0.2*22%) =0.094%
Therefore from the calculations above, investment in stock A is better in terms of its performance capacity.
Question two
Capital pricing model
g + (current annual dividends (1+x) /current price)
Where x is constant growth
For TASCO, the corresponding rate of return = 1261.66
For LBM, the corresponding rate of return= 1526.57
For EXXOS, the corresponding rate of return= 1837.22
Break-even Analysis
The breakeven point of company is when the company’s expenses are exactly covered by the sales made by the company. In that case therefore, the company is in position to makes sales of the units of its product produced to cover the expenses incurred in the production process with making any losses or profits.
Break-even point is = Fixed Costs/Price - Variable Costs
= (10,143,000/1.4296875)-25,137,000
=7,094,557.37704918-25,137,000
= (25,137,000)
The firm attains a negative break-even which is an indicator that its variable costs and expenses exceed you’re the overall sales made by the business.
The concept of capital structure represents one of the most important financial decisions made by management. To come up with the best capital structure management decision, a lot is involved and can therefore not be dismissed as just a simple science of calculation. Application of art can further enhance the understanding of the concept of capital structure management. The objective of science is to increase the data available relating to a particular attribute or behavior of a given entity. It is also concerned with the establishment of a theory that can ensure the predictability of the behavior of a given entity. These are more of concepts that do not provide conclusive criterion for the development of a proper methodology of capital structure. On the other hand art which is mostly concerned with the demand of a creation of something new. It’s for that reason that particular aspects of capital structure management are seen to be more of an art that a science. For a business to expand it must be able to tap into the financial resources. A variety of financial resources can be used by business owners. Some of them include the two categories of debt and equity. A lot of art is needed to be able to appreciate the concepts of debt and equity. "Debt” financing it involves borrowing money which the business will eventually have to pay back after a specified period of time with a certain level of interest. As regards equity, it involves raising money which is usually done by selling interests in the company. The two methods of raising finance are both prone to both advantages and disadvantages depending on the circumstances prevailing. To eliminate these challenges a lot of art must be involved as opposed to mere calculations of science In relation to the advantages of debt compared to equity, the following arguments can be made. The supporters of debt over equity contend that since the lender doesn’t have any claim as regards to business equity it is hardly rare to have the owners ownership interest diluted, (lmanen, 2011). As for the disadvantages of debt compared to equity, it is argued that since their interest is fixed and attached to the course of business operations. It can be seen that the argument is purely based on art It certainly has an influence on the company's break-even point (Hubbard, 2009). In these circumstances, the company’s breakeven point is seen to experience a very high increase. This is very dangerous as an inflated interest costs can easily lead to cases of increased insolvency in periods of hard financial times. With such high figures of financial leverage, it’s hard for a company to obtain faster growth given the constraints associated with servicing the Company’s debt. The application of science can be very critical in the determination of breakeven point, how it is pure art that must be put in play to be able to manage the break even dilemma which is essentially the most crucial part. It is through art that it can generally be appreciated that when an asset is highly risky, there is always a high potential for a bigger return and a high degree for a loss. It’s therefore solid enough to argue that capital structure management is more about the creation of something new as opposed to establishment of a theory. Hence it’s more of an art than a science. The relevance of risk factors within a changing platform in the financial sector provides a critical basis for examining the impact of financial transactions within a wider environment. In this case, the consideration establishes itself within a more dynamic point of reference where there are core objectives examined in vital business establishments. The case analysis provide the necessary mechanisms which enlists the support framework for the business and this is especially in a more concentrated level, argued by the amount of loss witnessed in the general operations of the company (Hubbard, 2009).
References
lmanen, A. (2011). Expected Returns: An Investor's Guide to Harvesting Market Rewards. John Wiley & Sons. ISBN 978-1119990727.
McAlpine, C. (2010). "Low-risk TSX stocks have out earned riskiest peers over 30-year period", The Financial Post Trading Desk, June 22, 2010
Hubbard, D., (2009). The Failure of Risk Management: Why It's Broken and How to Fix It. John Wiley & Sons. p. 46.
