The First and Second Paper Need to Be 4 Pages, Double Space, APA Format
The first and second paper need to be 4 pages, double space, APA format.
Assignment:
The company: Amazon
Part I
One specialized type of security is called an equity futures. This is a contract that guarantees you a share of a particular company to be delivered to you not today, but sometime in the future, at a price that is determined by the market right now. This price is usually called the futures price of the stock (note - the term is plural - "futures"). If you 'buy' this futures, you don't pay for the shares now. You are actually signing a contract whereby you are committed to pay that price in a particular date in the future, and you are guaranteed to receive one share of the company at that time, irrespective of its actual market price at that future date. Suppose for example that the futures price of the XYZ Company is $40. Suppose you 'buy' a 6-months futures contract. If six months later the share price is $45, you gain $5 per share. If the market price in 6 months is only $35, then you lose $5.
Using the Yahoo Finance take a look at the five year chart for your reference company (the one you chose for SLP1). Using this chart and other information you can find on this company, write a paper answering the following question:
What do you think would the futures price of 100 shares of your reference company to be delivered to you in one year be right now?
Part II
Every company has capital projects. The company you have selected must need something! Be it a new wing to the building, a new product line to be funded, a new piece of equipment, find one new acquisition your company needs.
Once you have identified the new possible investment item, what problems are you going to have in estimating the cash flow that might be emanating from the initial investment and problems in getting it funded? Issues might be:
- Risk
- Cost
- Politics (getting it through committees)
- Public Relations
- etc.,
Identify a potential capital project for your company describe such a project and write a short summary of the problems you see in getting the funding to see it through.
Assignment Expectations:
Part I:
This part is to be two pages long. You DO NOT need to use complex mathematical formulas for this assignment. Instead, think about how much do you think the market value of 100 shares of your company will be in one year? In considering the possible answers please reflect also on the following:
Do you expect the price of the shares in one year to be much higher? Or lower? Or only a little bit higher?
How risky the stock is. Is its price prone to wild swings up and down? Or has the price been relatively stable the last few years?
What alternative investments you have access to. What rate does your bank give you on a savings account or certificate of deposit? The greater return you can get on other investments, the less you would be willing to pay for an equity future.
Part II:
This part should be two to three pages in length, and should have references to the background materials or other sources you found for this paper. It must discuss both the estimates of the initial investments and the annual incremental after-tax cash flow that is expected to emanate from the investment.
This is what I have for part I:
I believe I would lose on a 100 shares of futures price on Amazon. Today, May 7, 2012, the Amazon stock closed at 225.16. Amazon’s stock has a record of rising, with occasional dips in the price of the stocks. On May 7, 2007, Amazon’s stock sold for $60.82 per share. The total increase from five years ago is $164.34.
Currently Amazon is building warehouses in new locations to provide more items for next day delivery. The states for the new locations presently do not pay taxes on the items they purchase from Amazon. Once the warehouses are operational at the new locations, the customers residing in those states incur taxes on their purchases from Amazon. I think this will affect the sales of Amazon. In addition, the economy is performing poorly. This will influence the sales or orders Amazon receives. Consumers are more selective and cautious in their purchasing.
Amazon is purchasing Kiva Systems Inc. This companyis leading innovator of material handling technology. The plan of Amazon is to use these robots in their warehouses. This will enable Amazon to save on labor costs from the hiring of temporary workers during times of increases in shipments. (Kucera, 2012) Amazon purchased Kiva Systems Inc., for $775 million in cash. I searched Amazon and other sites to determine how Amazon funded this purchase with no success.
Kucera, D. (2012, March 19). Amazon Acquires Kiva Systems in Second-Biggest Takeover. Retrieved from Bloomberg:
McCraken, M.E. (2009). The Time Value of Money. Retrieved April 1, 2012 from:
Time Value of Money: Self Paced Overview. (n.d.). Retrieved February 25, 2009 from:
2nd One: Amazon also
Part I
Using Yahoo! Finance find the value of beta for your reference company. Write a two page paper discussing the following items:
a. 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?
b. Given the beta of your company, the present yieldto maturity on U.S. government bonds maturing in one year (currently about 4.5% annually) and an assessment that the market risk premium (that is - the difference between the expected rate of return on the 'market portfolio' and the risk-free rate of interest) is 6.5%, use the CAPM equation in order to find out what is the present 'cost of equity' of your company? Explain what is the meaning of the 'cost of equity'.
c. Choose two other companies, look up their "Beta" and report the names of these companies and their betas. Suppose you invest one third of your money in each of the stocks of these companies. What will the beta of the portfolio be? Given the data in (b), what will the Expected Rate of Return on this portfolio be? Do you feel that the three-stock portfolio is sufficiently diversified or does it still have risk that can be diversified away? Explain.
Part II
Examine the structure and activities in your organization and identify two projects or events that required an investment. One should be a 'current project' and the other long-term investment project.
For each project or event, identify the preferable source of funding. You may not have access to the actual source of funding so limit your paper to the source YOU feel is most appropriate. Then explain why you feel that source is most appropriate.
Assignment Expectations:
Part I
In a two-page report explain your answers thoroughly with references to the background materials. Make sure to demonstrate a strong understanding of the concept of beta and the risk/return trade off.
Part II
Your explanation is the most important part of this paper. You should include references to the background materials or other articles and a discussion of the main concepts of this module as they relate to your choice of funding. The part should be two pages in length.
References:
Investopedia (n.d.). Capital Asset Pricing Model, retrieved August 2008 from:
MoneyChimp, (n.d.) CAPM calculator, retrieved August 2008 from:
Value Based Management, (n.d.) Capital Asset Pricing Model, retrieved August 2008 from:
To gain a deeper understanding of the CAPM and associated concepts beyond just the formula, read:
Damodaran, A. (n.d). Picking the right projects: Investment analysis. Retrieved August 2, 2007 from:
Risk and Return (1991).The Economist, 318, 72-73
This Article on Investment Analysis is a highly comprehensive overview on measuring risk and the use of the CAPM. This article is a good place to start because it will give you an idea of how the CAPM is used in the "real world" as well as demonstrate the basic concepts of this Module.