Financial Management - Essay Example

The companys fortunes have improved since the launch of a recovery programme by CEO Justin King in 2004. It is apparently closing in on ASDA with its improving market share of 16.22 per cent (ASDA:16.6 per cent). One of the three leading distributors of consumer goods in the UK, the Sainsbury group runs 350 supermarkets and 300 shops branded Sainsburys Local and Bells Stores, offering a range of articles from food to health care products, of which under half are sold under the companys own brand.

The company also owns real estate and a bank, Sainsburys Bank, which offers such services as loans, insurance, fund management, and credit cards. It is headquartered in London, England. This paper shall discuss the financial management policies of Sainsbury PLC with regard to three aspects of its operations: Capital Asset Pricing Model, the Weighted Average Cost of Capital, and Dividend Policy. In order to apply the Capital Asset Pricing Model, it is necessary to find a method to estimate the future beta, a component of a security’s risk which cannot be eliminated through diversification, which can applied in estimation of future returns.

The least squares regression can be used to develop a linear equation to explain the relationship between return on the stock and return on the market. The characteristic line is usually used to describe the relationship between the rate of return of a market portfolio and the rate of return of a security. It is derived by using regression analysis that summarizes a particular security or portfolios systematic risk and rate of return. The rate of return is dependent on the standard deviation of the assets returns and the slope of the characteristic line, which is represented by the assets beta.

A characteristic line of a stock is the same as the security market line. The slope of the line, which is a measure of systematic risk, determines the risk-return trade-off. According to this metric, the more risk you take on -