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Interest Rates, Bond & Stock Valuation
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2
Interest Rates, Bond & Stock Valuation
Introduction
The annual rate of return indicates to an organization the extent of growth in sales every
year in a specified period (Ross et al., 2022). Therefore, this technique is more appropriate when
measuring performance compared to the simple return that is often indicated by the average to
ascertain the extent of investment that the business has been able to accumulate over time.
The Coca-Cola Company (KO)
Rate of Return= (final amount received - initial value) / initial value* 100
Annual Rate of return formula = (Current Value/Original Value)1/n - 1
RoR=(64.35−24.84)/24.84∗100=159.06 %
Annualized RoR=(64.35−2 4.84 ¿ /20 =1.976
Beta of a company stock compares the risk or volatility to the overall stock market. The beta of a
stock depicts the estimated or anticipated change in stock price based on changes in the general
market, which is critical or for traders to make purchase decisions.
BETA for the data as calculated in Excel was 0.2686. the data was calculated based on the
adjusted returns of The Coca-Cola Company (KO) and Microsoft Inc. while giving attention to
the time periods and ensur they were similar. The formular used was =COVARIANCE.P(KO
returns range, MSFT returns range)/VAR.P(MSFT returns range)
Coca-Cola's Beta will be estimated as follows:
Risk free rate (3 month US Treasury bill) = 4.42%
Coca-Cola's stock rate of return = 9.8732587%
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Market rate of return = 15%
Difference between stock rate of return and the risk free rate = 9.873258 – 4.42
= 5.4532587%
Difference between the market rate of return and the risk free rate = 15-4.42% = 10.58%
Beta Estimate =5.4532/10.58
=0.5125
Difference between stock rate of return∧therisk free rate /Difference between themarket rate of return∧the risk fre
=0.5125
Actual Beta from the internet = 0.58 (5Y Monthly)
The beta value is below than the actual 1, indicating that the stock of Coca-Cola is often less
volatile than the market as a whole. The stock is quite volatile when generally compared to
whole market. Coca-Cola's beta according to the Source's beta value is 0.58, therefore, 0.2646 is
lower than the sources.
Expected annual rate of return of Coca-Cola Company
Computation of Expected Annual Return as from CAPM = Risk free rate (RFR)+βstock× Market
[Rate of return (Rmarket)− Risk free rate (RFR)]
=4.42% + 0.933195 * (15-4.42)
= 4.42% + 5.4532%
= 9.8732%
Question 2
Current value
∗1
Computation of Annual Rate of return is as follows = Original value
−1
n
4
1. Coca-Cola Corporation
¿(142.660904/28.739281)1/20¿ 1.083406542−1¿ 0.083406542∨8.34065419 %
2. Pepsi
¿(147.934601/39.602688)1/20−1 ¿ 1.068113133−1¿ 0.068113133∨6.811%
3. Walmart Inc. (WMT)
¿(52.779999/10.402401) 1/20−1¿ 1.08459298−1¿ 0.08459298∨8.459 %
4. Apple Inc. (AAPL)
¿(122.940002/0.334618) 1/20−1¿ 0.343560403∨34.560 %
5. IBM
¿(37.920025/18.946175)1/20−1¿ 1.035302716−1¿ 0.035302716¿ 3.5303 %
Conclusion
Apple Inc. has the best annual rate of return among the five evaluated securities,
indicating that it is performing well on the market and that potential investors should consider
purchasing its stock. Prior to making a decision, investors should be well-informed, as research
indicates that large rewards typically come with great risk. However, compared to other equally
attractive equities, Apple's stock price is relatively expensive. For instance, the stock price of
IBM is rather affordable and has been continuously increasing. As a result of previously
divulged information about Covid vaccination, its supply is projected to rise gradually in the near
future.
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References
Ross, S., Westerfield, R., & Jordan, B. (2022). Fundamentals of Corporate Finance. Bookman