Models Used For Computing The Discount Rate Finance Essay - Free Essay Example

Sample details Pages: 7 Words: 2140 Downloads: 4 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Investors are risk averse and evaluate their investment portfolios solely in terms of expected return and standard deviation of return measured over the same single holding period. Capital markets are perfect in several senses: all assets are infinitely divisible; there are no transactions costs, short selling restrictions or taxes; information is costless and available to everyone; and all investors can borrow and lend at the risk-free rate. 1. The model assumes that either asset returns are normally distributed random variables or that investors employ a quadratic form of utility. It is however frequently observed that returns in equity and other markets are not normally distributed. As a result, large swings occur in the market more frequently than the normal distribution assumption would expect. [2] Don’t waste time! Our writers will create an original "Models Used For Computing The Discount Rate Finance Essay" essay for you Create order 2. The assumption of CAPM model is inconsistent with the reality. a) efficient-market hypothesis: in actuall situation, we have trade cost, information cost and taxes. It is an im-perfect market. b) the borrowing rate=risk-free rate: the truth is that borrowing interest rate is higher than loan interest rate. c) CAPM can only be used for capital asset but not human assets. d) the estimated ÃÆ'Ã… ½Ãƒâ€šÃ‚ ² represents the past variability, but not the future variability.But the investors concern about the variability of future price. e) the risk-free property and the market investment portfolio may not exsist. 3. The model assumes that the probability beliefs of investors match the true distribution of returns. A different possibility is that investors expectations are biased, causing market prices to be informationally inefficient. This possibility is studied in the field of behavioral finance, which uses psychological assumptions to provide alternatives to the CAPM such as the overconfidence-based asset pricing model of Kent Daniel and Avanidhar Subrahmanyam (2001)[3]. 4. The model assumes that given a certain expected return investors will prefer lower risk (lower variance) and given a certain level of risk they will prefer higher returns. It does not allow for investors who will accept lower returns for higher risk. Casino gamblers clearly pay for risk, and it is possible that some stock traders will pay for risk as well. 5. The model assumes that there are no taxes or transaction costs, but in realistic situation, there are taxes and transaction costs. 6. The market portfolio should in theory include all types of assets that are held by anyone as an investment (including works of art, real estate, human capital). In practice, such a market portfolio is unobservable and people usually substitute a stock index as a proxy for the true market portfolio. Unfortunately, it has been shown that this substitution is not innocuous and can lead to false inferences as to the validity of the CAPM, and it has been said that due to the inobservability of the true market portfolio, the CAPM might not be empirically testable.[4] 7. CAPM provides a simple calculation for asset pricing, but it lacks of effective explanations about some abnormal phenomenon. The root cause is that CAPM is built on all investors have the same estimation and judgement about the expected risk and return. Efficient Market Hypothesis considers there is no asymmetric information and market frictions, the only thing affect the future average income is the invest risk. 3 ¼Ãƒ ¢Ã¢â€š ¬Ã‚ ° The formula The simple CAPM would appropriate for valuing dollarÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ dominated CF from a foreign target subject to no greater segmentation or political risk than the bidder faces. Ke= Rf +ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²i*(Rm-Rf) Ke is the expected return on the capital asset.Rf is the risk-free rate of interest such as interest arising from government bonds. (beta coefficient) is the sensitivity of the expected excess asset returns to the expected excess market returns. ICAPM The assumptions of ICAPM International investors should hold assets of each country in proportion to the country share in the world market portfolio.This implies that all countries, in a world without transaction and information costs, would hold the same portfolio and would diversify their investment in other countries in proportion to the size of their financial markets. The drawbacks of ICAPM The benchmark portfolio that is used to measure risk could be improperly specified. There could be problems with the returns data caused by infrequent trading of the component stocks. International CAPM implies that if international markets are fully integrated then the world market risk is the only relevant pricing factor, and the assets with the same risk have identical expected return irrespective of the market. The notion that risk can be defined as the sensitivity to the changes in world market returns is contingent on the assumption of complete market integration. As the amount of segmentation increases, risk takes on a new definition as a securitys sensitivity to local-market factors. In integrated world capital markets the sensitivity to many local events can be hedged by a diversified portfolio. That is, a negative event in one country may be offset by positive news in another country. However, if capital markets are segmented, the sensitivity to local events can have significant effects on the required returns for the securities that trade in the local markets. The formula As investors are holding in their portfolios assets from different markets, the relevant measure of the stocks risk (ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²) is its covariance relative to the variance of returns on the global market portfolio. Ke= Rf +ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²wi*(Rwm-Rf) Rf is the risk free rate. ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²wi is the beta of the asset i, that is, the covariance of returns on asset i relative to the global equity portfolio (such as the Morgan Stanley Capital International (MSCI) Index) divided by the variance of the MSCI Index. Rwm-Rf is the equity market risk premium on the global portfolio The Multifactor Model The assumptions of The Multifactor Model The assumptions of the Multifactor model come from the Arbitrage Pricing Theory (APT). 1. All securities have finite expected values and variances 2. Some agents can form well diversified portfolios 3. There are no taxes 4. There are no transaction costs The multifactor model has considerably fewer assumptions than the CAPM. The drawbacks of The Multifactor Model The Multifator models failure to identify the factors specifically in the model may be a statistical strength, but it is an intuitive weakness. The solution seems simple: replace the unidentified statistical factors with specific economic factors and the resultant model should have an economic basis while still retaining much of the strength of the arbitrage pricing model. That is precisely what multi-factor models try to do. Once the number of factors has been identified, their behavior over time can be extracted from the data. The behavior of the unnamed factors over time can then be compared to the behavior of macroeconomic variables over that same period to see whether any of the variables is correlated, over time, with the identified factors. There might be errors that can be made in identifying the factors. The economic factors in the model can change over time, as will the risk premia associated with each one. It is a problem when we try to project expected returns into the future, since the betas and premiums of each of these factors now have to be estimated. Because the factor premiums and betas are themselves volatile, the estimation error may eliminate the benefits of Multifactor model. In the CAPM, investors care about one risk factor-the overall market. InICAPM, they are also concerned about real currency fluctuations. This insight leads to a model of expected returns involving not only the beta of an asset versus the overall market, but also the betas of the asset versus currency movements and any other risk that is viewed differently by different investor segments. The ÃÆ'Ã… ½Ãƒâ€šÃ‚ ² of ICAPM consists of 3 factors, including the domestic stock market volatility, the worldwide stock market volatility and the correlation of the world stocks. The ÃÆ'Ã… ½Ãƒâ€šÃ‚ ² of CAPM cannot deal with the correlation of the world stocks. The standard CAPM cannot explain returns in a cross-section of national value portfolios. The ICAPM leads to a multi-factor solution for the pricing of assets. The new factors are the excess returns on assets that are perfectly correlated with the exchange rate appreciations for each currency but the benchmark currency. Utility varies not just because of variation in wealth but also because of variation in the purchasing power of the wealth. For given returns denominated in the foreign currency their purchasing power would be less when the domestic currency appreciates. Investors in the foreign market may hedge against this kind of risk by holding their own currency. The beta of Multifactor Model, whether measured against a single factor or against multiple world sources of risk, appears to have some ability to discriminate between high and low expected return countries. The CAPM and Multifactor Model are different approaches to assetpricing, but they are not contradictory. The idea behind the Multifactor Model is that investors require different rates of return from different securities, depending on the riskiness of the securities. The CAPM and Multifactor Model assume that only market risk is rewarded and they derive the expected return as a function of measures of this risk. The CAPM makes the most restrictive assumptions about how markets work but arrives at the model that requires the least inputs, with only one factor driving risk and requiring estimation. The Multifactor Model makes fewer assumptions but arrives at a more complicated model, at least in terms of the parameters that require estimation. 5. The extent to which these techniques may be properly applied in light of the recent crisis in financial markets. After the financial crisis, a court in the USA declared that all bubles are going to burst. The bigger the buble is, the bigger the lost is. This seems to pronounce the illegality of Efficient Market Hypothesis (EMH). But many people are still unwilling to admit the problems of EMH.Because of the CAPM which is based on Efficient Market Hypothesis, the investors turn a blind eye to the giant buble and let the buble develop. They thought the market can reflect all kinds of informations. Although a lot of people dont believe in Efficient Market Hypothesis, but they trust CAPM. The problem of CAPM is that it is based on a series of hypothesis which are of problems, such as investors can buy or sell any stock without affect the stock price. CAPM can lead to pricing anomalies. a) Value Premium puzzle: firms with high Book-to-MKT ratios (value stocks) perform better than those with low ratios (growth stocks). b) Size Premium puzzle: Small firms do better than large firms. c) Mean reversion in long term returns (over-reaction). d) Momentum in short term returns (under-reaction). e) Accounting-based anomalies (accruals, pension funding, etc.). In practice market portfolio does not exist, when using proxies we find that there are many othe sources of risk which are relevant for investors. We need to set both the portfolio selection and the pricing problems in the context of Multifactor model. Multi-factor models are used to construct portfolios with certain characteristics, such as risk, or to track indexes. When constructing a multi-factor model, it is difficult to decide how many and which factors to include.  Datas are evaluated on history statistic, which cannot accurately forecast future values. CAPM cannot explain the average returns of many investment opportunities: we need factors, sources of priced risk, beyond changes in the market portfolio in order to explain cross sectional variations in average returns. Multifactor models extend the CAPM precisely in this sense, attributing high average returns to positive correlation with additional risk factors other than movements in market risk. In general, the CAPM has the advantage of being a simpler model to estimate and to use, but it will under perform the richer Multifactor model when an investment is sensitive to economic factors not well represented in the market index. It is important to realize that the only reason why investors are willing to take risk is their perception of a positive expected return (in excess of the risk free rate). In an international framework, for instance, many investors do not have strong convictions about future currency movements. In other words, they do not have a positive expected return on any currency. If this is the case, currency movements induce additional risk in the portfolio that is not remunerated by a positive risk premium. Such risk should then be hedged. This leads us to the concept of the International CAPM, which is used in this study. The first source of risk is the World Market risk, for which investors anticipate a positive return. The main equity regions considered in this study react more or less to changes in this world market portfolio. This is measured by beta coefficients. The other sources of risk of an international investor are the above-mentioned currency risks. The investors portfolio has, of course, exposures to these risk sources (measured by currency beta coefficients), and to each source of currency risk there is an associated currency risk premium.

Of The Art Of Conversing By Niccolo Machiavelsso Essay

In the essay â€Å"Of the Art of Conversing†, Michel de Montaigne writes We can only improve ourselves in times such as these by walking backward, by discord not by harmony, by being different not by being like. He is assuring the reader that going against the grain is the most beneficial way of living and communicating, and in order to effectively lead people, it is essential for one to be open to change. He asserts that living through chaos is a way to further develop oneself, as outdoor studies majors we often exemplify methods of clashing the norms. The leaders we have studied throughout this semester have often represented the idea of adaptability through leadership set out by Montaigne. Within the essay â€Å"The Prince† by Niccolo†¦show more content†¦The book revolves around the leader of a trans-Atlantic expedition named Ernest Shackleton, who distinguished himself as a hero. Shackleton’s ability to get his men out of the dire situation they were in is owed largely to the qualities he possessed as a leader. Shackleton’s capacity to be decisive but also willing to compromise and adapt had a large contribution to the crew’s survival. When the Endurance became locked in the icy jaws of the sea, the crew was forced to abandon ship and eventually make a perilous journey on lifeboats to South Georgia island. The plan was to make it to the whaling station but due to rough seas the men arrived on the wrong side, Shackleton was equipped to handle this change in plans and made the journey on foot. From Shackletons own words â€Å"The rapidity with which one can completely change one’s ideas. . to a state of barbarism is wond erful.† The first-hand experience I have attained from guiding has taught me plenty about the qualities a competent leader must possess. Great leaders often share the trait of being flexible to better suit the needs of the group as a whole. When I used to guide day trips there were many times where I had to be flexible in order to suit the needs and desires of my clients; a particular time that comes to mind is when I took a group of elderly people out on the Matanuska Glacier. When I met with my group I began to assess their ability levels and planned out there hike accordingly, I

Gay Marraige Free Essays

Please, Just imagine this. You’re young, it’s the start of summer and you’re out with your favorite group of friends, soaking up the sunshine and relaxing. You all decide to leave the park, and go for a stroll down to town. We will write a custom essay sample on Gay Marraige or any similar topic only for you Order Now You pass by a brightly lit up bar, it’s got music pumping through the doormen and it looks alive. Heart racing, you tell everyone you all should go in and check it out. You slowly walk through the door frame and can see happy people everywhere, men and women dancing to their hearts content. Your eyes scan the room and suddenly your eyes are fixed on a person. Their face is lit up with excitement of the moment, and then their eyes are fixed on you, they smile and call you over to dance. You follow them onto the dance floor and the best night of your life unfolds. It’s now been 3 years; you’re madly in love with that one person you met at the bar. You’re living together, loving every minute you spend with each other. You want to take a step forward, take it to the next level and spend the rest of your lives together, officially, legally. But you’re denied this opportunity by the government; same sex marriage is illegal in Australia. The bill that my party would like to put forward is to legalize same sex marriage. In my opinion, same sex marriage would be a great opportunity for social progress. Two people who love each other should be able to publicly celebrate their commitment. It does not and should not hurt anybody else if it was allowed, and denying them is a violation of freedom. Denying them this opportunity can cause serious psychological damage and can make them feel little and not a part of the community. By allowing same sex marriage, it helps adoption because there are any problems with gay couples choosing to conceive a child, since 2000 the adoption by same sex couples has doubled. Allowing same sex marriage will almost guarantee that the adoption rate will rise even higher. Gay marriage is recognized, supported and legal in twelve different countries already. Now it’s Australia’s turn to Jump onto the band wagon. Introduction of same- sex marriage laws has varied by Jurisdiction, being variously accomplished through a legislative change to marriage laws, a court ruling based on constitutional guarantees f equality, or by direct popular vote. By providing the opportunity of same sex marriage it gives both people in the relationship hospital access during an injury or illness. It will allow them to have family health benefits, taxation and inheritance rights. In all fairness it would benefit us all, as a community in many different ways and should be legalized. It will bring people together, give us all the equal rights we should be entitled to and will end happily in the long run. Help us all close the gap within same sex marriage, bring forward social progress and How to cite Gay Marraige, Papers

Capital Maintenance Samples for Students †MyAssignmenthelp.com

Question: Discuss about the Nlc Doctrine Of Capital Maintenance. Answer: No Liability Company: Meaning A no risk organization is an open organization that is restricted by offers. According to s.112(2) of the Corporations Act, 2001, an organization is qualified to be enlisted as a no obligation organization just on the off chance that it satisfies the accompanying fundamentals: it has an offer capital the constitution expresses that its sole object is mining, and it doesn't have an authoritative ideal to recuperate calls made on its offers from defaulters. A body corporate that has not yet been enrolled as an organization likewise needs to satisfy the previously mentioned criteria with a specific end goal to enlist itself as a no risk organization. The principles relating to its enlistment are revered for the most part under s. 117-123, 136(1), 148, 152, 156, 162, 254B, 601BA. (French, 2014) Taking after are the means that an organization must attempt with a specific end goal to enrol itself as a no risk organization: Holding a Company Name According to s.148, an organization may enrol itself under an organization name, or work under its ACN, i.e. its Australian Company Number, which is created by the ASIC upon enrolment. Individuals and Obtaining Consents It is up to the incorporators to decide if the organization should take after the replaceable guidelines as enrolled in the Corporations Act, or draft its own particular standards as constitution. Since a no risk organization, generally, is an open organization, it is required to have no less than one secretary and at least three chiefs. Since a no risk organization additionally has an offer capital, its individuals are likewise required to agree to take up a predefined number of offers at the season of enlistment and to pay the sum owed by them in regard of the offers. Application to ASIC Keeping in mind the end goal to hold a name for the no risk organization, Form 201 is to be sent as an application to the ASIC. Enrolment by ASIC The ASIC will audit the application made by the organization and enlist it under the name or an ACN on the off chance that it regards that the organization satisfy all the previously mentioned prerequisites Doctrine of Capital Maintenance: Meaning The doctrine of capital maintenance - i.e. that an organization must acquire legitimate thought for offers that it issues and that having gotten such capital it must not reimburse it to individuals with the exception of in specific conditions - is a key rule of organization law. Indeed, the tenet stresses on an essential obligation of the organizations to keep the capital in place for the wellbeing of the lenders giving the command to the courts to regulate whether the capital is dispersed legitimately or not. (Knapp, 2013) History The explanations behind the birthplace of the convention can be twofold; right off the bat, to secure the enthusiasm of the lenders, and furthermore to guarantee the legal scattering of the advantages of the organization. The courts have dependably been on edge to stay with the capital of the intact for "the lender offers credit to that capital; offers credit to the organization on the confidence of the portrayal that the capital might be connected just with the end goal of the business and, subsequently, has a privilege to state that the enterprise should keep its capital and not return it to its shareholders." (Hendricks, 2014) However, it merits specifying that the principle has been produced through a progression of legal elucidation in organization law cases in England. Jessel M. R., in Flitcrofts Case, by implication expressed around two parts of the principle of capital support "i) the lenders have a privilege to see that the capital is not scattered unlawfully; and ii) the in dividuals must not have the capital come back to them surreptitiously. These two angles are represented by the standards of a) capital lessening and b) organization appropriations." For an illustration, where an organization activities the alternative to recover redeemable inclination shares, the obligation of an executive under s 588G might be activated at the time that the organization practiced the choice.(Visser, 2014) Exceptions subject to specific exemptions, the use of the precept gives: 1. An organization can't purchase back its own offers unless it takes after strict methods set around the Act. 2. An auxiliary organization can't be an individual from its holding organization. 3. An organization is not allowed to give money related help to people who are procuring its offers. 4.The shareholders can just get profits from its distributive benefits.(Tomasic, 2015) Conclusion The doctrine of capital maintenance had been struck down by Corporation Act. The doctrine has been argued to be of no use to the creditors, is outdated and meritless, as the exceptions that it bears supersede it. Further, the logic provided is fallible as, in practice, creditors do not rely on the share capital to recover their debts and usually enter into contractual agreements with the company to protect their own rights. Thus, the doctrine is irrelevant in the Australian context.(Novak, 2014) References French, D., Mayson, S., Mayson, S.W. and Ryan, C., 2014.Mayson, French Ryan on company law. Oxford University Press, USA. Hendricks, R. and Blackwood, C., 2014. Capital management.Tax Specialist,17(5), p.222. Knapp, J., 2013. A Reconsideration of Consolidation Accounting Requirements and Pre?acquisition Dividends.Australian Accounting Review,23(3), pp.190-207. Novak, A., 2014. Capital sentencing discretion in Southern Africa: A human rights perspective on the doctrine of extenuating circumstances in death penalty cases.African Human Rights Law Journal,14(1), pp.24-42. Tomasic, R., 2015. The Rise and Fall of the Capital Maintenance Doctrine in Australian Corporate Law. Visser, A., 2014.The return of capital to shareholders by means of a repurchase of securities(Doctoral dissertation, University of Pretoria).