A firm’s beta is an evaluation of volatility, which compares to a broad market. It generally determines how a firm's equity market value varies with variations in the overall market. Beta is considered when examining investment decisions. For instance, in financial management, a stock with a beta equal to one assumes its price moves hand in hand with the market, putting it to your portfolio may not add much risk. A stock with a beta higher than one may indicate that it’s more volatile than the market, which means it has a potential for more robust returns. On the other hand, if a stock has a beta less than one, it's less volatile than the overall market, which means adding it to your portfolio may reduce risk.
Home Depot company has a beta of 1.03 (5Y monthly). On the other hand, Amazon, Walmart, and Kroger have betas of 1.34, 0.28, and 0.37, respectively. They lie in the same industry, retail. However, the firm's difference in betas may be due to several factors, including capital structure. In this case, each company works with a different capital structure, thus causing the difference in beta. Also, debt finance is another factor. For example, Kroger company has low debt finance; therefore, it has a lower beta than Amazon, which has higher debt finance resulting in high beta. Magnitude in the beta calculation is another reason for the difference in beta for each company. Walmart and Kroger have a beta less than one indicating the stock is less sensitive to risk. In contrast, Amazon and Home Depot have a beta higher than one meaning the stock is more vulnerable to risks, which causes the beta to differ.
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Part 2: Capital budgeting
Both Net present value (NPV) and internal rate of return (IRR) approaches are essential in the evaluation of capital expenditure. However, the two are different. For instance, NPV is the difference betwixt present inflow and outflow cash values over a given time. On the other hand, IRR is a metric utilized in capital budgeting to approximate the profits expected on investments (Arjunan, 2017). NPV emphasizes project surplus, whereas the IRR method focuses on equalizing a project’s cash flow. In most cases, the net present value method is commonly used since the difference between cash inflow and cash outflow is an essential element in determining a business's current profits. This implies that NPV is much more reliable and better than IRR; thus, it is the best approach when ranking conflicting projects
The main goal of any firm or company is to maximize its owner's wealth. Any business strives to maximize profit and increase revenue by minimizing cost; if a firm cannot operate with the goals of a shareholder wealth maximization, then shareholders would have little interest to accept the risk necessary for a business to succeed.
Ethical behavior can be of considerable significance to business cooperation. Proper ethics attract customers to the firm's product, thus improving the business's sales and profit. It also reduces labor turnover and, therefore, raising productivity. Ethic rating posts a reduction in risk as a probable advantage. An active market recognizes an ethical financial premium to a culturally responsible firm resulting in benefits in the firm compared to the less ethical firms.
Reference
Arjunan, K. (2017). A New Method to Estimate NPV and IRR from the Capital Amortization Schedule and an Insight into Why NPV Is Not the Appropriate Criterion for Capital Investment Decision. Available at SSRN 2899648 .
