Reference no: EM132164855

Read through the below post and provide any on of the following: APA format 300 Words.

. Ask a probing question, substantiated with additional background information, evidence or research.

· Share an insight from having read your colleagues' postings, synthesizing the information to provide new perspectives.

· Offer and support an alternative perspective using readings from the classroom or from your own research.

· Validate an idea with your own experience and additional research.

· Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings.

Part 1: Beta

Beta is a measure of the risk of a stock when it is included in a well-diversified portfolio, the beta for cisco as of today is 1.26. The Capital Asset Pricing Model breaks down expected stock returns into two mechanisms.

Firstly, the return that would be expected based on covariance with the movements of the market (for most stocks, when the market as a whole goes up, the price of the stock will also go up) (Whited, T. M, 2017). Secondly, part is the increase in the price of a stock that is not explained by the market. The first part covariance with the market is what Beta captures.

I learnt that when Beta is positive, the stock price tends to move in the same direction as the market, and the magnitude of Beta tells by how much.

If a stock's Beta is greater than 1 like in the case of Cisco, that means that when the market index goes up 1%, we expect the stock will go up by more than 1%. On the contrary, if the market goes down by 1%, we expect the stock to go down by more than 1% (Marshak, R. 2006). Negative Betas, while rare, signify a negative correlation. When the market goes up, we would expect the stock price to go down.

To get an idea of where stocks typically land, here are a few common stocks. Utility stocks typically have a beta of less than 1. Meanwhile, high-tech stocks, such as Google and Apple, have a typical beta higher than 1. Due to the work that each company completes, the risk levels for the stock land in an area typical for their business.

Part 2: Capital Budgeting

The term "capital budgeting" is the process of determining which long-term capital investments should be chosen by the firm during a particular time period based on potential profitability, and thus included in its capital budget (Gitman, L, 2016). It is extremely important to firms since capital investment projects make up some of their most important financial investments. These projects often involve large amounts of money and making poor capital investment decisions can have a disastrous effect on the business.

What I see is for businesses, it gives an opportunity can create certain capital projects based somewhat on a "wish list" of future goals, while expenses are often driven by need or requirement (Zutter, C, 2012).

Companies often must incur expenses that don't directly generate a profit, such as warehouse rent, administrative labor costs, and business insurance, while the company can earn a profit and have more influence over the costs of their capital projects through good financial management. Comparing the rate of return of a project to the firm's weighted average cost of capital is not as simple as it sounds. The process involves some relatively complex financial analysis that the business owner needs to conduct to find the answer.

Both the quantity and timing of the project's cash flows must be considered. If you are writing a business plan, for example, you need to estimate about three to five years' worth of cash flows. Usually, cash flows are estimated for the economic life of the project using project assumptions that strive to create as much accuracy as possible.

References:

Bazdresch, S., Kahn, R. J., & Whited, T. M. (2017). Estimating and testing dynamic corporate finance models. The Review of Financial Studies, 31(1), 322-361.

Gitman, L., & Zutter, C. (2012). Managerial Finance. Boston: Prentice Hall - Pearson.

Marshak, R. (2006). Cisco Systems. doi:10.1571/cs7-20-06cc