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Determine the financial soundness and growth rate

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Reference no: EM132164852

Read through the below post and provide any on of the following: APA format 300 Words.

. Ask a probing question, substantiated with additional background information, evidence or research.

· Share an insight from having read your colleagues' postings, synthesizing the information to provide new perspectives.

· Offer and support an alternative perspective using readings from the classroom or from your own research.

· Validate an idea with your own experience and additional research.

· Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings.

Beta

The business performance is measured using various parameters to determine the financial soundness and growth rate of a given organization.

It is through this analysis that the strengths and weaknesses of a company are known (Burger & Hawkesworth, 2013). Beta is one of the most important measures of equity market volatility. Beta can be thought of as asset elasticity or sensitivity to market. For example, if the Beta of equity is 2, it will be expected to outperform the market when the market is going up significantly.

The beta of 1 indicates that an asset and market will generate similar returns during over time. Therefore, Beta is a measure of individual stock risk relative to the overall volatility of the stock market and is calculated based on very sound finance theory - Capital Assets Pricing Model (CAPM).

In this case, we are going to look at Amazon's Beta value that is calculated using the following formula. Amazon Beta = Covariance ÷ Variance = 1.81.Other Beta values for other companies include Alibaba 2.37, Walmart 0.51 and eBay with a beta value of 1.01.Different companies have different beta values since they all have varied financial strengths and overall market performance.

Capital Budgeting

It is of importance for an organization to know how it is going to get profits after investing. Different methods can be used, and this includes, Net Present value method and Internal Rate of return method.

In NPV the present values of the cash flows are compared to the initial investments, and if the difference is positive or negative, then it is accepted or rejected. On the other hand in the internal rate of return, the NPV for investment is taken to be zero (Burger & Hawkesworth, 2013).

This method considers the time value of money and relies on proceeds of cash generated from projects. The best approach to use in capital budgeting is the Net Present Value method.

References

Burger, P., & Hawkesworth, I. (2013). Capital budgeting and procurement practices. OECD Journal on Budgeting, 13(1), 57-104. Doi: 10.1787/budget-13-5k3w580lh1q7

Jarrow, R. (2014). Computing Present Values: Capital Budgeting Done Correctly. SSRN Electronic Journal. Doi: 10.2139/ssrn.2383896

Reference no: EM132164852

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