What Is the Estimated Beta Coefficient of Your Company? What Does This Beta Mean in Terms of Your Choice to Include This Company in Your Overall Portfolio?

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Date Submitted: 11/17/2012 06:27 PM

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Wal-Mart Stores, Inc. (NYSE: WMT)

Question a

Wal-Mart Stores Inc. is the largest retailer and grocery chain in the United States with fiscal year 2010 sales of $405 million. The company has four elements in its corporate strategy such as dominance in the retail market, expansion in the U.S. and international markets, creation of positive brand and company recognition and branch out into new sectors of retail. “A leader in sustainability, corporate philanthropy and employment opportunity, Wal-Mart ranked in the top ten among retailers in Fortune Magazine’s 2010 Most Admired Companies survey.” (walmartstores.com) According to Yahoo! Finance, the beta for Wal-Mart is 0.46. This means that the new portfolio’s beta will increase or decrease by Wal-Mart’s beta multiplied by the investment in this stock relative to the total portfolio investment if the original portfolio’s beta is lower or higher than 0.46.

Question b

Wal-Mart cost of equity for Wal-Mart is 7.49%. CAPM = 4.5% + 6.5%*0.46 = 7.49%. This means that every time the company funds a project and if that fund comes wholly or partially from equity, the cost of doing so is 7.49%. This cost is akin to the interest rate charged by banks for loans extended to debtors.

Question c

The companies I chose is Apple Inc. (NasdaqGS: AAPL) and Berkshire Hathaway Inc. (NYSE: BRK-B). The beta for Apple Inc. is 0.82 and Berkshire Hathaway Inc. is 0.55. Portfolio beta is equal to 1/3 * 0.46 + 1/3 * 0.82 + 1/3 * 0.55 = 0.61. While, the expected portfolio return is equal to 4.5% + 6.5%*0.61 = 8.465%, I feel that the three-stock portfolio is not sufficiently diversified. This means that there is still risk that can be diversified away. The portfolio’s beta is 0.61, the more diversified the portfolio is the closer its beta to 1 is.

Part 2

Wal-Mart current project is to purchase merchandise inventories which can be funded using current accounts payable. This is appropriate since the project is short term. Additionally,...