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project 2 writing

# project 2 writing - BMGT 340 Summer 2011 Section 0102...

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BMGT 340 Summer 2011 Section 0102 Professor: Elinda Kiss Project Part II, Writing Assignment Yi Fan Shi (Rocky) 6/26/2011 In second part of this project, I will focus on four aspects to analyze and evaluate the financial situation of Caterpillar Inc. In sequence, I will discuss its market risk, estimate cost of equity, company risk analysis, and finally comparable analysis. A M Market Risk In the finance field, the market risk is usually measured by Beta. Differed from the diversifiable risk, which also refers to specific of companies’ stocks, the market risk rate of a stock is always sustainable, and is not able to be offset through the management of stock portfolio. Due to this important fact, finance expert measure the level of riskiness as well as return through computing Beta. According to the static reflected by the financial situation since June, 2006, Caterpillar’s market risk rate is 1.7174, which can be found at the “X Variable 1 Coefficients” in the ANOVA table. Furthermore, the coefficient for the market return represents the slope of the regression line , whose equation is displayed below, r = 0.86% + 1.72 (MP), Where: 0.86% = r RF, MP = r M – 0.86% which provide the date of risk free rate (r RF ), which is 0.86 according to this statistic. As I have mentioned, the market risk rate is 1.7174 for Caterpillar. Inc, which means, in general, that Caterpillar Inc. is 72% more risky than that of average market, since the average risk of market is 1. On the other hand, Caterpillar’s 1.72 Beta may be good news for its investors, because they may have opportunities to win a profit of 72% more than that of the average market. Through the comparison the data collected from several financial websites, the market risk rate, Beta is not the same according to different sources. For example, this

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project 2 writing - BMGT 340 Summer 2011 Section 0102...

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