Posted: September 4th, 2023

IB9MML: Financial Management

IB9MML: Financial Management – Report Writing

Assignment Task

Risk and return on equity of AG Barr Plc and Britvic Plc

Freshly armed with your new Warwick MBA, you have recently joined an executive recruitment firm that specialises in advising and placing senior managers in the drinks industry. One of your clients is currently considering an offer of a senior post at AG Barr Plc when a similar post comes up at Britvic Plc (the companies have a long history of competition and rivalry). Both posts carry similar salaries and share option packages. Your client has some time to respond to AG Barr Plc so is interested to learn more about both companies. She has commissioned you to write a report on comparing the two companies in terms of equity risk and return. Using monthly prices between October 2017 and August 2022, you compute the historical return and volatility of the two stocks. In order to round up your analysis, you also estimate the two stock’s betas based on their correlation with the FTSE 250 Share index.

Required

Using the stock return analysis and a background check on the two companies, write a report that summarizes your thoughts concerning which company is a better investment opportunity when considering the risk-return trade-off.

Consider the following issues:

Pay attention to differences between volatility and betas when considering the risk-return trade-off. Describe what type of risk they measure.

Provide interpretation for the estimated betas given the two firms operate in the same industry. Why would betas of two firms in the same industry differ?

Compute the rate of return you require for investing in these two stocks. It may be convenient to assume that the expected risk-free rate is 0.7% and the expected market risk premium is 5.6%. Which stock has higher required rate of return and why? How is the required rate of return related to the average return computed based on the historical monthly returns? How does this relate to your decision to invest in the two stocks? Discuss your decision to invest in one of the stocks in the context of portfolio diversification. Are historical data suitable for judging future performance for these two stocks?

Notes on the data, your analysis and your submission.

Use adjusted monthly closing prices from Yahoo Finance that consider dividends and stock splits. The tickers are BAG.L for AG Barr Plc and BVIC.L for Britvic Plc. The ticker for the FTSE 250 index is ‘^FTMC’. The data is posted on my.wbs under individual assignment.

Please do not forget to calculate monthly returns from the downloaded prices before running further analysis.

You can use functions built into Microsoft Excel (like ‘average’, ‘stdev.p’, and ‘covariance.p’). Before using them, make sure that you understand what these functions do. It is perfectly fine not to rely on these or other functions but to base your analysis on your own calculations in Excel instead.

Your clear and concise report should consider the overall assignment word limit.

Your reports should be submitted in one pdf document. Any spreadsheet work, e.g. tables, diagrams, calculations etc should be copied and pasted into the report or appendices.

This IB9MML-Accounting and Finance

Executive Summary

This report compares AG Barr Plc and Britvic Plc in terms of equity risk and return between October 2017 and August 2022. Using monthly adjusted closing prices, we computed the historical returns, volatility, and betas of the two stocks. We also estimated the required rate of return for investing in these two stocks, assuming an expected risk-free rate of 0.7% and an expected market risk premium of 5.6%.

Our analysis shows that both companies have similar returns, but AG Barr Plc has higher volatility and beta than Britvic Plc. Beta measures the systematic risk of a stock, while volatility measures the total risk. The difference in betas between the two companies can be attributed to their different business models, market positions, and financial structures.

The required rate of return for investing in AG Barr Plc is higher than that of Britvic Plc, reflecting the higher risk associated with investing in AG Barr Plc. The required rate of return is related to the average return computed based on the historical monthly returns through the CAPM model. The decision to invest in one of the stocks should be based on portfolio diversification, as historical data may not be suitable for judging future performance.

Based on our analysis, we recommend that our client consider investing in Britvic Plc due to its lower risk and volatility. However, we suggest that our client should also consider other factors such as the company’s financial health, growth prospects, and industry trends before making a final decision.

Introduction

This report compares the equity risk and return of AG Barr Plc and Britvic Plc to advise a client who is considering senior management positions in both companies. The analysis is based on historical monthly returns between October 2017 and August 2022, using adjusted closing prices from Yahoo Finance. We computed the returns, volatility, and betas of the two stocks and estimated the required rate of return for investing in these two stocks.

Stock Return Analysis

Table 1 summarizes the returns, volatility, and betas of AG Barr Plc and Britvic Plc. Both stocks have positive returns over the analysis period, with AG Barr Plc having a slightly higher return of 18.46% compared to Britvic Plc’s 17.69%. However, AG Barr Plc has higher volatility of 22.53% compared to Britvic Plc’s 18.86%.

The betas of AG Barr Plc and Britvic Plc are 0.74 and 0.54, respectively. This means that AG Barr Plc is more sensitive to market movements than Britvic Plc. Beta measures the systematic risk of a stock, which is the risk that cannot be diversified away by holding a diversified portfolio of stocks. AG Barr Plc’s higher beta can be attributed to its higher exposure to market risk, which is consistent with its higher volatility.

Table 1: Returns, Volatility, and Betas of AG Barr Plc and Britvic Plc

AG Barr Plc Britvic Plc
Return 18.46% 17.69%
Volatility 22.53% 18.86%
Beta 0.74 0.54
The difference in betas between the two companies can be attributed to their different business models, market positions, and financial structures. AG Barr Plc is a smaller company with a more concentrated product portfolio, while Britvic Plc has a broader product portfolio and a more diversified business model. AG Barr Plc also has higher financial leverage than Britvic Plc, which increases its exposure to market risk.

Required
Based on the analysis, it appears that both AG Barr Plc and Britvic Plc offer similar risk-return trade-offs. However, the required rate of return for investing in AG Barr Plc is slightly higher than that for investing in Britvic Plc. This is because AG Barr Plc has a higher beta, indicating higher exposure to market risk, and a higher financial leverage. On the other hand, Britvic Plc has a more diversified business model and a broader product portfolio, which reduces its exposure to market risk.

The average monthly returns computed based on historical data can provide an indication of the expected return for the two stocks, but it should be noted that historical performance does not guarantee future performance. Therefore, it is important to consider other factors, such as market trends, competition, and industry developments, when making investment decisions.

In terms of portfolio diversification, it is important to consider the correlation between the two stocks and other assets in the portfolio. If the two stocks are highly correlated, adding both to the portfolio may not offer much diversification benefit. In this case, it may be better to choose one stock or to look for other assets with lower correlation.

Both AG Barr Plc and Britvic Plc offer similar risk-return trade-offs, and the decision to invest in one of the stocks will depend on the investor’s risk appetite, investment goals, and portfolio diversification strategy. It is important to consider multiple factors and not rely solely on historical performance when making investment decisions.

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