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comparison between EDF group (МдlectricitМ© de France) and E.ON S E from an investor's perspective point of view - Assignment Example
Author : glovereunice
Finance & Accounting
Pages 16 (4016 words)
Introduction Many companies exist in the present and not all companies perform as well as others. The performance of companies is a critical area for some, mainly the investors who have invested capital amounts into the company. Investors can use a wide variety of tools to measure performance, but mainly focus on financial analysis, including ratio analysis, as well as other finance tools such as the Capital Asset Pricing Model (CAPM)…
It is assumed that the reader has basic knowledge of these tools of analysis. Capital Asset Pricing Model (CAPM) According to Rai University: “The CAPM was developed to explain how risky securities are priced…CAPM aims at a more practical approach to stock valuation.” The assumptions of CAPM include: 1. Investors hold diversified portfolios 2. Single-period transaction horizon 3. Investors can borrow and lend at the risk-free rate 4. Perfect capital market (Rai University, 2013) Capm reflects that investors need to be compensated in two ways Time Value Of Money Risk (Investopedia, n.d.) The risk-free (rf) rate in the formula represents the time value of money invested at a minimum rate while the other half of the formula represents market risk applicable to the company. CAPM is in the view that the expected return of a stock is equal to the rate on a risk-free stock plus a risk premium. If the expected return does not match or meet the required return then any such investment is termed to be not feasible and is not to be carried out. The betas calculated in the attached working represent the risk of the specific company in relation to the market. ...