TFIN 202: Relationship between Beta and Financial Ratio Assignment Sample

• Subject Code : TFIN-202
• Subject Name : Corporate Finance

Corporate Finance

Part-2

Ans 1. Beta is a measure for the volatility or the systematic risk of any portfolio. It is in comparison with the market as a whole. It helps in describing the relationship between the systematic risk and the returns that are expected for the assets or the stocks. It is used in calculation through CAPM i.e. (Capital Asset Pricing Model). Beta helps in describing the changes in returns that that will vary with respect to the market changes. It helps in understanding the movement of stock with respect to the market, whether stock goes up with the market or moves in the reverse direction from the market.

Ans 2. The beta that has been found is Equity beta. It can also be referred as levered beta. This type of beta measures the risk that includes the structure of capital for the company and also the leverage it holds. The stocks of CSL ltd. includes the overall capital structure and then the prices are reflected on the stock exchange. This beta will help in studying the changes in stocks of company as compared to changes in the market trends.

Ans 3. Price/ Earnings ratio helps in analysis the valuation of stocks. It helps in understanding whether the prices of stocks are overvalued or undervalued. It helps in analyzing the market value of its stock with respect to its earnings. It shows what an investor or the market is willing to pay for each rupee of company’s earnings. If the P/E ratio is high, it depicts that the prices of stocks are overvalued and vice versa.

Debt/Equity ratio helps in calculating the financial leverage for the company. It depicts the position of financing for the company. The degree of debt and the equity that is used by the company in performing its operations. It helps in understanding the ability of the shareholder’s equity in covering the debts in case of any downturns in the business.

Time’s interest earned: It measures the ability of the company to meet the obligations of the debt that are based on the current income of the organization. This depicts how much the company is making on $1 of interest it is paying. It indicates the ability of the company for covering its debt.

Market value/ Book value: Market to book value ratio is used to analyze the current market value of the company in comparison to its book value. Market price represent the price of the current stock while the book value refers to the value of shares as per the amount of assets divide by the outstanding shares. Lower ratio will depict that stock prices are undervalued while higher value will mean that stocks are overvalued.

Ans 4: R-square is a measure that depicts how close the data is with respect to the regression line. It is also referred as coefficient of determination or the coefficient for determination of regression. It is the response percentage of variable variation.

It ranges from 0% to 100%.

• 0% r-square represent that there is no variability of the response data with respect to its mean.
• 100% represents the variability from the response data around the mean.

There are certain limitations with respect to the r-square. It does not help or indicate in knowing whether the model of regression is adequate or not.

According to the model in the Moodle, R- square stands at 69.04%. This depicts that responses are variable with respect to the mean or the regression line. The following image depicts a possible scenario for this:

There are certain diversion from the mean line and some are close. Thus, it depicts a 69% of variance or diversion.

Ans 5:

The r-square of beta and p/e where beta is an independent variable and p/e is dependent stands at 4.6%. This means that the variable do n0ot show much of a variance from the regression line. The p value is at .512% that means the model for regression is at confidence level as alpha is at 5%. It can be used as (1-alpha)

The r-square for beta versus debt/ equity is at 2.6%. It is closer than what beta vs p/e variables. The variances or the responses are close knitted. Also, it represents a confidence model and can be tested for (1-alpha) as p value is at 1.6% that is below the testing value of alpha at 5%.

Regression of beta vs times’ interest earned has an r- value of 2.6%. It is same as of beta versus debt/ equity. Also the p-value measure stands at 1.6%. It too can be used as confidence model.

R-value of Beta versus market value/ book value is at 9.6%. The responses for this too are not much scattered. Yet, they are scattered than above all the R-values. P-value is lowest for it all. It means the probability of changes is lowest. And it represents a confidence model as p-value iis less than the testing value of alpha at 5%.

And 7: Beta and P/e ratio does not show any specific connection with respect to each other. Even the coefficient between the two is negative. P/E of the company has improved over time, yet with that movement beta has not changed. It has stayed near the border line. R- Value too is not significant means the value for the variable remain around the mean and there are no changes in movement of P/E with respect to beta.

Beta and D/E moves in line. Yet the fall in beta is more than debt/ equity. They are in line with each other. When beta improves d/e also improves for the company. In the same manner when there is fall in beta d/e also shows a decline. While Beta and interest earned and beta and market value. Book value does not show any specific correlation between the R-value of all the above reading are below 10% and p-values are up to 1% only. The graph movement shows that only debt and equity ratio is connected with the beta. This is the reason the beta used is levered as it includes both the capital for the company.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Corporate Finance Assignment Help