Question

Select a company from the Dow Jones Industrials Index and prepare a risk analysis.

You risk analysis should include minimally below:

*Credit rating

*Beta value

*CAPM required return on equity investment

*CAPM rates to use:

-Risk Free Interest Rate = 2.85%

-Market Risk Return = 8.25%

Answer 1

Here, Apple Inc. is selected from the Dow Jones Industrial Index for risk analysis. the required information for such analysis are as under.

Credit rating ; AA+

Credit rating of Apple Inc. is AA+ which is just below the highest AAA rating. Therefore the fianacial risk profile is considered minimal

Beta Value : 1.10

Beta Value measures the risk or volitality of a company's share price in comparison to market as a whole For example, a company with a beta of 1.1 will theoretically see its stock price increase by 1.1% for every 1% increase in the market. Put differently, if you're expecting the overall market to return 8%, a stock with a beta of 1.5 should return 12%. The median company in the Information Technology sector has Beta of 0.93. Apple's Beta is 18% greater than the sector median for the most recent period.

CAPM Required Return : = Rf + Beta (Rm -Rf)

= 2.85 + 1.10 (8.25)

= 11.925%

in the above calculation Rm-Rf is called as Risk premium which is also called as Market Risk Return which is 8.25% in the given question.