To apply the mathematics of finance to determine risk, return, evaluation of investment, financing, working capital and distribution decisions.
Valuation of Stock
It is process to determine the current worth of company
It help the investor to know whether the investment made in the company will be profitable or no
There are multiple methods to value the stock (Reilly and Brown, 2011)
Case 1: Advice Given to Mr. George
On looking at the above ratios and other calculation it is strongly advised to Mr. George to invest in FMG
FMG is recommended because it has high market value, return on equity is much higher than OZ Minerals, sustainable growth rate is also higher than the OZ Minerals and Intrinsic value is also higher than its market value.
Intrinsic value of OZ Mineral is lower than its market value
Concept of Risk and Return
Returns refer to the gain or loss that arises from the investment in the stock
Returns are calculated in percentage and it is calculated for particular period
There are number of factor that impact the returns and they are termed as risk
Risk refers to the deviation in the actual return of the stock from the expected return
Risk and its type
There is low level of uncertainty i.e. low risk when investments are made in stocks with the low potential returns
There is high level of uncertainty i.e. high risk when investments are made in stocks with the high potential returns
There are mainly two types of risks
Systematic Risk also refers to market risk
Unsystematic risk also known as specific risks or residual risk (Moles and Kidwekk, 2011)
Recommendation to potential investor
It is highly recommended to invest in the FMG Limited
It has high returns with moderate risk of investment
It does not deviate much in relation to the market condition
Unsystematic risk is greater than 1 (Davies and Crawford, 2011)
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Lumby,S and Jones,C. 2007. Corporate finance theory & practice. Thomson.
Moles, P. and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.
Reilly.F.K. and Brown.K.C. 2011. Investment analysis & portfolio management. South western Cengage learning.