a) Should small or high-growth firms have higher betas than larger and more mature firms? Discuss....

a) Should small or high-growth firms have higher betas than larger and more mature firms? Discuss. Due to the distinctive nature of unsystematic risk, it can be reduced or eliminated through diversification. Do you agree with this statement? Explain.

Expert Solution

Answer to Question 1)

Small firms shall not have the advantage of economies of scale as compared to the larger firms. Also, they shall not have the ability to withstand the severe macro economic implications; Hence, these firms shall carry higher risk interms of their capabilities and operational sustainability. Similarly, high-growth firms generally have aggressive approach, interms of expanding their operations, expanding to different geographies, etc. In this aspect, they shall be more prone to various risks and instabilities. While the growth-oriented firms go with the ideology of calculated risks, the exposure to certain severe risks shall be more evident.

Answer to Question 2)

Risk is an inherent concept to be considered in every investment. Two major components of risk are systematic risk and unsystematic risk. Systematic risk is a result of external and uncontrollable factors. These might not industry or sector or security specific and it can affect the entire market leading to the fluctuation in prices of all the assets / businesses / securities / investments.

On the other hand, Unsystematic risk refers to the risk which emerges out of controlled and known variables that are industry or sector or security specific.

Systematic risk cannot be eliminated by diversification of portfolio, multi businesses / sectors, whereas the diversification proves helpful in avoiding unsystematic risk.

Diversification can greatly mitigate the impact of unsystematic risk. It is unlikely that all events under unsystematic risk would happen in every firm / investment at the same time. Therefore, by diversifying the risk can be mitigated.

Diversification reduces risk by allocating investments among various financial instruments, industries, and other categories. It targets to maximize returns by investing in different areas that would each react differently to the same event. There shall be chances that the risk from one investment can be subsidised thru potential high return from the other investment.

jeff jeffy answered 1 year ago

Typically the cost of capital for a growth firm is higher than that of a mature...

Typically the cost of capital for a growth firm is higher than that of a mature firm, although a mature firm pays dividends, while a growth firm does not. Explain this apparent anomaly using the DCF formula. Clearly indicate the impact of dividend payment (mature firm) versus the absence of dividends (growth firm) in your analysis.

All else equal, firms with higher leverage (D/E ratio) tend to have higher betas. However, when...

All else equal, firms with higher leverage (D/E ratio) tend to have higher betas. However, when firms are heavily levered (near the “zone of insolvency” or bankruptcy), their betas tend to drop significantly. Without mentioning anything about the equation for beta, briefly explain why this phenomenon might occur.

Define leverage. Discuss why some firms have higher leverage than other firms. Within a multinational corporation,...

Define leverage. Discuss why some firms have higher leverage than other firms. Within a multinational corporation, should subsidiaries have similar or different leverage ratios? Why?

Do MNEs (Multinational Enterprises) have a lower or higher cost of capital than domestic firms? Discuss.

Which of the following is true of the multiplier: A) It is larger or higher than...

Which of the following is true of the multiplier: A) It is larger or higher than 1 when unemployment is below the natural rate of unemployment. That is government is spending increases or tax decreases have less effect when the economy is doing well. B) It is smaller or below 1 when unemployment is below the natural rate of unemployment. That is government spending increases or tax decreases have less effect when the economy is doing well. C) It is...

Cash should have a higher required return than accounts receivable because it is more liquid. True...

Cash should have a higher required return than accounts receivable because it is more liquid. True or False.

During a credit crunch, small firms appear to be harmed more than large firms are. Explain...

During a credit crunch, small firms appear to be harmed more than large firms are. Explain why this is true.

. Firms with higher ethical standards will experience a higher level of economic performance than firms...

. Firms with higher ethical standards will experience a higher level of economic performance than firms with lower or poor ethical standards. Do you agree? Why or why not . Review the code of ethical conduct for management accountants. Do you believe that the code will have an effect on the ethical behavior of management accountants? Explain.

On average, small, less well-known companies have lower long-run returns than larger, more well-known companies. True...

On average, small, less well-known companies have lower long-run returns than larger, more well-known companies. True or False?

Small high-swirl direct-injection CI engines have fuel conversion efficiencies which are about 10 percent higher than...

Small high-swirl direct-injection CI engines have fuel conversion efficiencies which are about 10 percent higher than values typical of equivalent indirect-injection engines. (ID1 engines are used because they achieve higher bmep.) What combustion-system-related differences contribute to this higher efficiency?

Question