2.1.1 Return for financial year 2014/15
Total return is obtained by:
Total return = dividend yield + capital gains
the formulas to obtain, dividend yield and capital gains, respectively are as follows:
dividend yield = (interim dividend + final dividend) / initial share price capital gains = (final share price - initial share price) / initial share price
where the initial share prices is the closing value on 1/7/14 and the final share price is the closing value from 30/6/15. Additionally, tax considerations need to be identified and therefore franking credits have been added to the dividends, shown in appendix F.
dividend yield = (interim dividend + final dividend) / initial share price = (0.2142 + 0.2142)
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Return on market = (final index value - initial index value) / initial index value = (5451.2 - 5366.5) / 5366.5 = 1.58%
As the return on market calculated is smaller than the risk free rate, creating a negative risk premium, this outcome is illogical. This can be expected when calculating return on market as it is based on past values and therefore is an estimate. For the purpose of this assignment, the time horizon for this calculation has been expanded to include the month of july in order to create a sensical risk premium. In making this variance it is noted that reliability has been slightly
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Return on market = (final index value - initial index value) / initial index value = (5681.7 - 5366.5) / 5366.5 = 5.8735%
2.1.2 Security market line (SML)
To analyse whether Telstra’s stock is correctly valued the capital asset pricing model is used to create a security market line (SML). Refer to Appendix for calculations used to create this graph.
There are three clear points on the SML diagram shown above; government / risk free bonds expected return (0, 2.72), telstra’s expected return on stock (0.41, 4.0115) and the expected market return (1, 1.58). The SML line is created through connecting the risk free return and the expected return, creating the slope equal to market risk premium (3.15).
Government bonds are noticeably the least risky type of investment. This is because these bonds have a fixed return as they are unaffected by what happens in the market (no systematic risk). This is reflected on the SML graph by a beta of zero, representing no systematic risk, and a low return, obtained from the 10 year Australian government bond yields, of
Midland’s choice of market risk premium of 5% does appear to be an appropriate selection in this instance. From exhibit 6, we found that this EMRP is lower than the historical data of U.S. stock returns minus Treasury bond yields and is higher than the market risk premium from the survey results. So we recommend that the risk premium rate can be narrowed between 4.8% to 5.6%. 4.8% is the lowest of higher EMRP while 5.6% is the highest of the lower EMRP. In a word, our team think that 5% is a reasonable market risk premium.
Although this investment class can be considered the most conservative of the three, the low yield of government bonds in the past 10 years does not lend a comparative metric against many other investment opportunities (Jacobs, 2012). The fixed rate of these instruments allows for a guaranteed return, but should only be utilized at a point in an investing cycle when risk is higher than potential income growth. The 25% allocation that is invested in this class is positioned to provide a long term guaranteed investment, with the possible that these lower rates will not rise significantly in the next few years.
AGENDA 1. 2. 3. 4. 5. Announcements Financial Markets and Net Present Value Survey Results Optional Material (e.g. Cases, Practical
Given these approximations, the CAPM model would total the risk-free rate and the market risk premium times beta to arrive at a cost of equity of 9.68%, which reflects the investors’ expected return from investing in shares of the company.
Think of this in general as X/Y. So, the money market formula is, in general,
According to the newspaper, the Rf (risk free-rate) for a long-term Government of Canada Bonds is 5.82%. The RM (return on the market) as the geometric average for Market Index is 10.2%. For the accuracy reason, we chose to use the geometric average for both long-term government bonds and market portfolio.
Cost of Equity = Risk free rate + (Market return – risk free rate) X beta
Expected return on market rate Rm is provided at page 175 in Myers and it is the average nominal return on stocks for the last century, the value is 11.7%
$10,644,800 / $2,271,400 = 4.69 Times Return on Common Stockholders’ Equity (2002) $647,645 / $1,928,960 = 33.58% Return
by x%, the portfolio changes by x*beta% market value of the market representation product used for short selling
2. Actual return was calculated for all the companies as well as for the BSE 500 on the event period days (-60 to +60).
Where Kf= risk free rate, Km = market rate, B = beta, (Km-kf) = risk premium
Interest rate #’s, Betas, Book values on debt and equity are given. Also historical performance #s are given.
The return of PSC fund is calculated as PSC return = alpha + beta x Market return
The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date;