StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Financing New Ventures - Assignment Example

Cite this document
Summary
A free-risk-security is one which has a guaranteed returned either from insurance or government pays the investor in case of security fails to…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER94.1% of users find it useful
Financing New Ventures
Read Text Preview

Extract of sample "Financing New Ventures"

Capital Asset Pricing Model According to capital asset pricing model the return expected from securities should be equivalent to the rate of risk-free-security. A free-risk-security is one which has a guaranteed returned either from insurance or government pays the investor in case of security fails to meet the agreed return. Importance of capital asset pricing model (CAPM)This model considers systematic risks, this are the risks that are do occur on daily basis and are normally referred to as unknown risks.

This is a reality since, investors will never invest to any business that he/she has doubt that returns from his investment will not be realized. This has paved way for diversification in investment According to (Harrington, 1987) it allows the investor to avoid unsystematic risks such as poor management of the company which will automatically lead to returns not being realized. From this model a linear relationship has been developed to show the relationship between systematic risk and the expected return.

As compared to weighted average cost of capital (WACC) this model gives a robust discount rate that can be used for assessing the investment. Using WACC a project can be turned down when its internal rate of return is less that of WACC. This is because WACC is based on the assumption that any investment doesn’t have an effect to financial and business risk. Using CAPM, gives internal rate of return that is higher than the security market line and a return that can minimize or eliminate system risk.

CAPM is considered as the best tool to calculate the cost of equity as compared Dividend Growth Model (DGM). This is because it takes into account the systematic risk level of the business relative to stock market.Portfolio effect and individual securityPortfolio effect refers to the addition of other investment into the portfolio with aim of reducing risk. This can be termed as diversification of portfolio such that change in the value of one investment e.g. bond in the portfolio there will be a response to change in the value of other assets in the portfolio.

Portfolio effect has the ability to minimize a specific risk attached to an asset in a given portfolio, but this depends or lies on the degree of correlation of assets held in the portfolio (Hirt & Block, 1990). Diversifying portfolio can be achieved in either horizontal or vertical diversification both will help to reduce the risk associated to a given asset, vertical diversification occurs when an investor decides to add different form of assets or securities in his portfolio e.g. cash, corporate bonds, and building.

This is advisable since whenever a different sector is affected by inflation or other macroeconomic effect the other sector will be bail out the investor from losses he would have incurred if he had invested in one sector.Horizontal diversification is where an investor holds one type of asset or security in his portfolio but checks its performance and keeps on changing to reduce the possible risk that will be associated to asset if he hadn’t change the asset in the portfolio. For instance an investor might have shares in his portfolio of different companies.

He will keep track on the performance of each company’s shares and make a wise decision which share are risky. Since not all shares can suffer low price index or decreasing stock price, he will get returns from other shares he has invested to the other companies it is advisable the companies ought to be of different industry. References Harrington, D., & Harrington, D. (1987). Modern portfolio theory, the capital asset pricing model, and arbitrage pricing theory: A users guide (2nd ed.). Englewood Cliffs, N.J.: Prentice-Hall.Hirt, G., & Block, S. (1990). Fundamentals of investment management (3rd ed.). Homewood, IL: Irwin. .

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Financing New Ventures Assignment Example | Topics and Well Written Essays - 500 words”, n.d.)
Financing New Ventures Assignment Example | Topics and Well Written Essays - 500 words. Retrieved from https://studentshare.org/finance-accounting/1669071-financing-new-ventures
(Financing New Ventures Assignment Example | Topics and Well Written Essays - 500 Words)
Financing New Ventures Assignment Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/finance-accounting/1669071-financing-new-ventures.
“Financing New Ventures Assignment Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/finance-accounting/1669071-financing-new-ventures.
  • Cited: 0 times

CHECK THESE SAMPLES OF Financing New Ventures

A Variety of Sources of Development Financing for the Company

This can be done by establishing new ventures or expanding.... Some of the new ventures that can be explored include developing new product lines, creating and sustaining a presence in a new geographical area and establishing a new market.... The funds that are required by businesses, organizations or enterprises either to start up new ventures or to bolster already existing ventures may be acquired through external sources or internal sources....
13 Pages (3250 words) Essay

New Venture Creation

Topic: Individual Business Report - new Venture Creation Institution Affiliation: Date: Introduction Global trends in business undertakings have necessitated the need for creativity and innovativeness in businesses, in a bid to survive the competitive local and international environments....
6 Pages (1500 words) Essay

Hospital Corporations of America

There will be funds set aside, from the affiliate institutions, to help in Financing New Ventures that it intends to open within the United States and abroad.... In addition, it intends to incorporate new growth and expansion strategies such as telemedicine, mergers and joint ventures and improve on employee satisfaction in a bid to restore clients' confidence and enhance good governance/organization culture within its institutions....
5 Pages (1250 words) Essay

New Business Venture

Various business ventures are happening day to day and each business requires not just initial capital to start off, but there is also a need for working capital for day to day stock needs, salaries and administrative cost.... In this case, it is advised to look in for a more structured form of finance rather than unstructured financing option like funds from relatives and friends....
3 Pages (750 words) Essay

Accounting for Jointly Controlled Entities

The venture is to state the operations of ‘Proportionate consolidation method' and ‘Equity method' in simplified way to understand the accounting of interests in joint ventures on consolidation of financial statements of venturer.... Further an evaluation of each of the… hods has been made in this write up in order to make suitable suggestions to International Accounting Standard Board for adopting either of methods instead of treating them as alternative methods to choose from under IAS 31. 1....
4 Pages (1000 words) Essay

Encompass Technologies Inc International Venture

nbsp;… The decision to venture into new markets must be taken with caution considering the many hurdles of setting up in a new environment.... Good communication will help us plan and come up with ideal strategies on how to enter new markets.... he decision to venture into new markets must be taken with caution considering the many hurdles of setting up in a new environment.... Good communication will help us plan and come up with ideal strategies on how to enter new markets....
6 Pages (1500 words) Research Paper

Explain and justify the ventures potential success

Basically, debt financing is a cheaper form of raising funds for ventures compared to equity funds.... Basically, debt financing is a cheaper form of raising funds for ventures compared to equity funds.... Subsequently, equity capital has the long-term potential for generating superior returns for the investors and is thus considered as appropriate source of finance especially for new business ventures....
1 Pages (250 words) Essay

Differing perceptions of new venture failure

(1999). In this study, the authors examined the failures of new ventures from the… Research has shown that over 20 percent of new ventures fail in their first year of establishment while another 66 percent fails within the next 6 years.... Name)(University)(Course)(Tutor)(Date)In this study, the authors examined the failures of new ventures from the perspectives of both the entrepreneurs and the venture capitalist in the context of attribute theory....
1 Pages (250 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us