Question

Apply 10 topics and formula of risk and return to the IKEA

Company. Explain each
Apply 10 topics and formula of working capital to the IKEA
Company. Explain each

Answer 1

Applying risk and return concepts to IKEA involves evaluating the potential returns against business risks and using various formulas to understand the company's financial status. Topics such as Expected Return, Standard Deviation, and Portfolio Diversification help assess the risk, while working capital formulas like Current Ratio and Quick Ratio determine financial health.

Step-by-step explanation:

Applying risk and return concepts and working capital formulas to a company such as IKEA involves evaluating the trade-off between potential returns and the risks associated with various business decisions or investments. Here are a few topics:

1. Expected Return (ER): Expected return is the average of a probability distribution of possible returns. For IKEA, calculating ER on investments could be based on historical sales data of products or potential projects.
2. Standard Deviation (estimation of risk): This measures the dispersion of returns around the expected return. The more variable IKEA's returns, the higher the risk.
3. Portfolio Diversification: IKEA can reduce risk by diversifying its product portfolio, decreasing the impact of the failure of any single product or market.
4. Capital Asset Pricing Model (CAPM): CAPM helps in determining the expected return on equity, factoring in the risk-free rate, beta (volatility in comparison to the market), and market risk premium.
5. Beta Coefficient: This measures the stock’s volatility relative to the overall market. For IKEA, a higher beta implies higher risk with potentially higher returns.

And for working capital:

1. Current Ratio: It is used to assess IKEA’s ability to pay its short-term obligations with its short-term assets, calculated as Current Assets / Current Liabilities.
2. Quick Ratio: Also known as the acid-test ratio, it measures IKEA’s ability to meet its short-term obligations with its most liquid assets and is calculated without inventory.
3. Inventory Turnover: These measures how often IKEA’s inventory is sold and replaced over a period. A higher turnover implies better sales efficiency.
4. Working Capital Turnover: Indicates the efficiency of IKEA’s use of its working capital to generate revenue.
5. Days Sales Outstanding: This measures the average number of days that IKEA takes to collect revenue after a sale has been made, affecting its cash flow and working capital.