Capital Assets Pricing Model and Discussion on How Companies Finance their Operations

Essay by m_University, Bachelor'sA, October 2009

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Questions to be answered:1.Select a UK/US company which has issued either equity or debt/bond for the last 5 - 10 years. Identify and critically assessa.the reason(s) for, andb.the advantages and disadvantages of each of those issues,Using sources such as Nexis (available from the Birkbeck's elibrary),,, textbooks or journals/articles to support your arguments.

2.Explain clearly, and provide reasoned arguments for, the share price movement after each equity or debt issuance.

3.Using the Capital Assets Pricing Model, compute the beta of your selected company. Critically discuss the advantages and disadvantages of the data and methodology used.

The purpose of this essay is to address three distinct questions using Diageo (DGE.L) as an example. I will discuss why and how companies raise finance and what are the advantages and disadvantages of that. I will then move to question two, and as Diageo raised finance via issuance of debt, I will try to identify how this impacted on the prices of Diageo's shares.

Finally, I will discuss the theory of Capital Assets Pricing Model and use it to calculate Diageo's beta.

Diageo was formed in 1997 by a merger of Guinness and GrandMet. Diageo produces and distributes some of the world most famous brands of spirits, beers and wines ( Some of the brands under Diageo's umbrella include Guinness, Johnnie Walker whiskies, Smirnoff vodka and Baileys Original Irish Cream just to mention the few. The company operates in more than 180 countries and employees over 22,000 staff ( Diageo is involved in every stage of their products' live cycle starting from production, distillation and brewing, through bottling and packaging finished beverages, up to distribution, sales and marketing (

Over the course of last ten years, Diageo issued number of bonds to raise capital. Due to the length constraints I...