Question

Speech Accessibility Tracking Compare Proofing Language Comments Changes ink Resume Investing In a new factory Investing in a factory building is always one decision corporations will have to make and it is usually based off why a new factory is needed and if it will be profitable for a company to expand. McCormick and Company is contemplating on whether to build a new factory in Largo, Maryland. McCormick decided it would issue additional shares of stocks in order to fund the construction of the factory instead of using operating cash flow. McCormick & Company's levered Beta is 0.60 and its expected return on the market is projected to be 8.03%. Stock prices are listed at $155.7 per share with a constant growth of 0.087. It is assumed that an investment with a positive NPV will be profitable, and an investment with a negative NPV will result in a net loss (Kenton, 2019). McCormick should invest in a new factory. Creating a new factory will assist their growth plan and provide jobs for everyone in the Largo Maryland area Understanding Risk and Returns In investing, risk and return are highly correlated. Increased potential returns on investment usually go together with increased risk. For investments with equity risk, the risk is best measured by looking at the variance of actual returns around the expected return. On investments with default risk, the risk is measured by the likelihood that the promised cash flows might not be delivered. ("Risk and Return - How to Analyze Risks and Returns in Investing", 2019) Since every corporation wants to be sure it can yield a return and looks at risks involved. The risk-return tradeoff states that the potential return rises with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if the investor will accept a higher possibility of losses (Chin, 2019).. In this case, the results and yield outweigh the risk and it will be a good investment. References: 290 words CO D.Focus 100% e e 5:45 PM Type here to search 61% 20 11/26/2019

can someone please read my risk and returns and let me know if it makes sense. if it does not could you explain please. Thanks

Answer 1

Solution:-

The explanation of risk and returns is a good one and can definitely be used. It nicely details the risk reward relationship. However, since the question hasn't given much details about the expected returns from the new factory and specific risks related to the expansion, below is a possible alternative for your reference which is based more on the information available in the question. Since, the information available is too low, the comments can only be more generic rather than specific calculations or certain conclusions.

Risk and Return:

1) McCormick & Co. has a very comfortable beta of just 0.6 which means that the stock is not volatile and the business is not very risky. Since, the company is expanding its existing lines of business by opening a new factory, this indicates that risk of new project will be in line with the risk in existing business and expansion through a new factory is a right strategic decision as growth will nicely complement the existing low risk levels and boost the stock price.

2) Although, the crucial point here to consider for the company is whether the factory expansion would yield a ROI of at least 8.03% or not. This is the return that market expects from the business and if the expected return from project is at least 8.03%, it will be taken positively by the market.

3) The expected rate of return on the stock (EPS/Price) is 8.03% which means that the stock is currently valued at a PE ratio of 12.5 (1/8.03%) which is a good valuation multiple for a business. This means that there decision to build factory through additional equity offering rather than retained earnings is a good move (as market is giving them a good valuation) and reduces the financing risk in the business by keeping liquidity levels high as existing cash would continue on the balance sheet instead of going towards factory.