discussion on Beta and Capital Budgeting|My homework helper

Posted: January 29th, 2023

Response to discussion in 250 words-APA

 

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Beta

The company I have as part of my group project is ALLETE Inc which is responsible for providing clean electricity for the Midwest region. The overall beta for ALLETE Inc is 0.72. ALLETE Inc’s competitors include  PG& E whose beta is 1.1, EGAS is 0.21 and third company is Minnesota Energy Systems whose beta is 0.45. Beta is a method for comparing a stock’s volatility to that of the market as a whole. Stocks with a value lesser than 1 are more  unpredictable than the  request, meaning they will generally go up  further than the  request goes up, and go down  further than the  request goes down.  Stocks with a beta of  lower than 1 have a smoother lift  than the  request’s, generally still go up when the  request goes up and down when the  request goes down.  If the company has negative beta, which is not common, it will  generally move equally to the  request. Traditional and modified versions of the capital asset pricing model, as a rule, predict the value of stock returns much closer to the risk-free rate of return than that later on observed in reality (ZOZULYA, V., SOKOLOV, E., KOSTYRIN, E., & KOROLEV, S. (2021)). Beta makes extensive use of data. Beta provides you with an idea of the stock’s movement over the past three years in comparison to the market, typically reflecting measurements from at least 36 months ago. In addition, the price history of many technology stocks is insufficient to establish a reliable beta because they are still relatively new to the market. Since a single stock’s beta measure fluctuates over time, it is unreliable.

Capital Budgeting

Capital budgeting requires dealing with high uncertainty from the unknown characteristics of cash flow, interest rate, and study period forecasts for future periods. Many fuzzy extensions of capital budgeting techniques have been proposed and used in a wide range of applications to deal with uncertainty (Sergi, D., Sari, I. U., & Senapati, T. (2022)). The complexity of the management and decision-making processes today necessitates a variety of approaches and strategies for investment evaluation. Management employs capital budgeting strategies to determine which projects will yield the greatest return over a specified time period due to the limited amount of capital or money available for new projects. Net Present Value(NPV) in cash flows associated with the acquisition of a fixed asset using net present value analysis, then reduce these cash flows to their present value. Then, accept the projects with the highest net present values until funds run out by comparing all projects with positive net present values. Companies frequently use the internal rate of return (IRR) to evaluate profit centers and select capital projects. However, this metric for budgeting can also assist you in evaluating specific personal financial decisions, such as mortgages and investments.

SOLUTION

Beta is a measure of a stock’s volatility in relation to the overall market. A beta of 1 indicates that the stock’s price will move with the market, while a beta less than 1 means it is less volatile than the market, and a beta greater than 1 indicates higher volatility.

Capital budgeting is the process of determining the feasibility of long-term investments, such as new equipment or facilities. This process involves forecasting future cash flows and comparing them to the initial cost of the investment. The most widely used techniques for capital budgeting are the net present value (NPV) method and the internal rate of return (IRR) method. Both methods take into account the time value of money and the risk of the investment.

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