1. Explain and critically evaluate the above statements, drawing upon relevant academic literature.
When pricing the assets of an organization, it is important to take into consideration the risk factors that may come along while undertaking the activities of the organization. The managers of the organization are supposed to evaluate the risks so that the prices which the risks will cost will not have a significant impact on the capital requirements of the business. For a firm to realize maximum sales in terms of production it should be able to keep the prices of its assets as high as possible and reduce the total liabilities because when the total value of liabilities is higher than the prices of assets, then the firm will incur huge losses. With regards to the potentiality of the market, the investments placed on assets should be concomitant with the prices which are stipulated by the consumers from the market. When the market prices for assets are different from an organizations set prices, then the purchase of assets will be hard for the consumers making it hard for the organization to acquire its returns (Fama 2014). Investors have a huge role to play in making sure that the prices of the assets are close to those set in the market so that sales made by the organization have a positive impact on the capital investment of the firm. Consequently, the firm has to establish the financial position of the marketers and consumers of the assets so that whatever they take out to the market does not remain unsold. The investors in an efficient market have to be aware of any time variation or cross-sectional in expected returns.
According to Lewellen and Shanken (2004), the returns will be low suppose the dividends will exhibit an inverse proportion compared to a high rise in terms of value; this will, therefore, call for the extrapolation of the dividends performance into the future by the investors. Before an insurance company decides on giving its services to a business firm, the company must be able to ensure that the value of assets available at the firm is sufficient enough so that suppose the firm undergoes a risk, then the assets should amount to a reasonable value to compensate the loss incurred by the firm (Wang and Xia 2012). Consequently, the investors of the firm have to be reliable suppose there is the need for compensation in the business and the value of dividends is not enough to enable the firm to acquire a loan. Ultimately, a business has to inquire about the market prices so that whenever it takes its products or assets out for sale, it does not suffer the loss of mispricing. Capital contribution by the investors also allows the firm to gain stability in the market. Investing in high-risk assets has more returns than the investments in small risk assets (Bodie 2013). The amount of money required to fully settle an insurance cover for a high-risk asset will always be higher and the time might also be short depending on the vulnerability of the asset.
2. Discuss whether investors do this in reality. You may refer to recent case study evidence to support your answer.
In reality, investors have been seen to be reluctant in matters regarding assets pricing. A firm can never enjoy the product of its input suppose it does not get sufficient support from its investors. It is a mandatory requirement that for a firm to acquire a loan or an insurance cover, it must have a strong capital source which includes investors. Marketing strategies that make it easier for a business to sell its products are paramount in ensuring the optimal realization of sales. Marketing is a dynamic process aimed at generating income or capital for an individual or individuals so as to meet his or their daily needs. Marketing as a competitive task requires various strategies in order for one to be in the competition rank. Managers of companies are required to deploy effective and efficient strategies that are different or if the same, they should be more advanced than what their competitors are offering. Advertisements and promotions services are some of the various ways through which the marketing portfolio can be undertaken in an economic environment (Fama and French 2004). Investors lack of information about an organization which they have invested money in places the organization at a financial risk in the market making it hard for the organization to get high returns making the number of dividends to be high.
Investors also are people who have high priorities and at times it might be hard for them to meet the capital requirements of certain business organizations; therefore, this calls upon frequent reminders from the managers of the organization to sustain their productivity. Emphasis needs to be kept upon regular attendance of investors during annual general meetings held by the organization for changes in deals among other commitments that involve the investors. Consequently, all business organizations have to take note of the fact that no investor can accept to invest in a business which does not have a reputable financial record; therefore, the financial records of the business have to be well kept and computed without any errors.
Bodie, Z., 2013. Investments. McGraw-Hill.
Fama, E.F., 2014. Two pillars of asset pricing. The American Economic Review, 104(6), pp.1467-1485.
Fama, E.F. and French, K.R., 2004. The capital asset pricing model: Theory and evidence. The Journal of Economic Perspectives, 18(3), pp.25-46.
Lewellen, J. and Shanken, J. [Online] (updated 2002) Available at http://web.mit.edu/lewellen/www/Documents/EstimationRisk.pdf [Accessed May 01, 2017]
Wang, S. and Xia, Y., 2012. Portfolio selection and asset pricing (Vol. 514). Springer Science & Business Media.
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