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Financial Decision Making - Coursework Example

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When looking to invest in a company the process of deciding which company provides the best return on investment can be very time consuming and complex. In general most investors are looking to minimize investment risks while realizing the maximum return possible…
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Financial Decision Making
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Financial Decision Making

The price earnings ratio measures the relationship between stock dividend payout and a stock’s market price in order to compare a stock’s performance against any other stock. One can also use earnings per share in order to determine how a company compares to another in terms of current dividend paid. This two key investment ratios can only be used with company’s that are publicly traded and issue stocks Additionally there is a wealth of investment advice and current company profiles and analysis available on the internet, which make the task of choosing an investment much easier for the private investor. For a company that is not publicly traded, an individual must use other forms of financial analysis in order to determine what the best investment option is and how much the required rate of return needs to be in order to justify the risks associated with a specific company. We have been presented with three individual companies as possible investment alternatives none of the companies are publicly traded. The three possible investment choices are: 1) Acme Consulting-Although the initial investment of the company is low at $50,000,the company will be a start up venture so the risks related to the investment are always highest with a new company. Acme will be a management consulting firm with a high level of expertise and experience specializing in marketing and distribution of high technology products and solutions in the international market. The initial operating focus for the company will be the European and Latin American markets and the American market for foreign clients. Acme will provide high value services at the highest costs the market will bear the company will be targeting primarily large manufacturers of high technology products such as IBM, Apple and HP as potential clientele. 2) Interstate Travel Center- Is also a start-up company which will consist of a will be full service truck stop and service center to be located in Texas. The initial start up costs for the project will be 2.75 million in order to buy the land and build the 6,000square foot facility which will include a restaurant, convenience store, gas/ diesel islands and service facilities and amenities. The required capital investment will be $250,000 from an investor/s and a 2.5 million loan. 3) Silvera and Sons- This is a successful well establish business dedicated to the distribution and exportation of premium Brazilian Arabica Coffee beans. Its main customers are premium American specialty roasters and wholesale to the local Brazilian market. For the last six years demand for the company’s products has exceeded capacity, so the company has had to refuse a lot of larger shipments, therefore losing a lot of potential sales and customers. The company wants to expand their production capacity in order to fulfill the additional demand. The company is confident that they will be able to sell all additional production of their premium Arabica beans. Since the investment will be used to fulfill the demand for their products, and it is a successful profitable company, it seems that the safest investment for an individual would be to invest in Silvera and Sons. Although it was not required in this assignment to calculate the discount rate for each company, I took the initiative in my research of learning how to calculate the discount rate. In order to calculate the required rate of return or discount rate one must determine what the risk free interest rate is, the average market return, market risk premium ... Read More
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