Strategic and Financial Decision-making Essay Example | Topics and Well Written Essays - 2250 words

Strategic and Financial Decision-making - Essay ExampleBoth the companies are listed on a lower floor FTSE 100.Under CAPM the calculation of cost of capital depends on the principle that the rate of return required on a security is equal to the risk-free rate of interest plus a risk premium, establish on the following formula-Therefore the beta of Sage Group as per calculations is less than the beta that has been published in Bloomberg site and the beta of Diageo Plc as per calculations is also less than that has been published in this site. There enkindle be many reasons for this contravention. Like in the slick of data like beta that is reported by a site the calculations are more(prenominal) extensive. For the purpose of the calculations, the monthly returns relating to the last twenty four months provided has been taken. But the beta estimation in Bloomberg is based on either daily returns or quarterly returns over a long span of time. near sites base their calculations on the data since the stock inception. As the beta calculated by these sites is based on a longer span of time thusly they are more reliable as it covers a larger number of data points. So the difference in time frame can result in different beta estimates. Some of the pecuniary services use weekly observations while others use monthly observations whereas others base their calculations on the last mean solar day of trading.Another reason for the varying beta is that they are calculated using different indices in the market. Some sources use Standard & Poor 500 as the benchmark index, some use Russell 1000, 2000 and others use look on Line Index. In such situations the best way is to choose which provides the beta for most of the companies in the road map (Pratt & Niculita, 2007, pp.211)It may be possible that the fundamentals of the company have changed over time in that case the beta that is calculated based on a recent period is more reliable (Pratt & Grabowski, 2008, pp.141). establish on this it can be said that the beta based on the recent period is more reliable as