Company’s price history

The assigned company is The Bank of New York Mellon Corporation (BK). The current share
price is $50.01 per share (Yahoo Finance, 2019). The stock has high fluctuations in the short run,
it can be seen from the graphs below in the appendix that for the period up to one year the stock
prices fluctuated a lot and the value is depreciated by 8%. In the same period, the company has
paid dividend four times of the same value of $0.28 totaling $1.12 implying a dividend yield of
2.25% which is lower than the entire depreciation loss. The stock underperformed in the last
year. However, the stock performed well in the long run, it appreciated from $35 to $50 per share
in the last five years marking an annual compounded growth of 7.40% (Yahoo Finance, 2019).

Prospects of the industry

The banking industry has better prospects in the future because of transformational reforms that
will take place through technology and regulatory opportunities (WSJ, 2019). The regulatory
framework has strengthened itself after the 2008 financial recession. It is expected that the
efficiency levels of these banks will increase and the industry grows economically. The industry
will be giving better results to the investors. The banking industry will grow, the number of
offices and digital presence will increase (Deloitte, 2019). Government control is now better and
it is forecasted that the increasing credit demand in many countries will allow the banks to
increase their assets. Further, there the allied financial services like insurance both life and
health, investments, mutual funds, financial advisory businesses will also increase making room
for profit maximization for the industry.

Estimation of Company’s risk measures

The volatility of the company’s share prices can be observed by calculating the standard
deviation from the data of past prices. The more the number of transactions is picked in the
sample, the accurate will be the results. The data is collected from Yahoo Finance and then
standard deviation is calculated followed by calculation of covariance and correlation. This
allows the calculation of beta possible.

The value of beta comes out to be 0.94, it is the risk that exists within a company irrespective of
systematic risk that exists at more levels. The beta value tells us about the relationship of risk to
the return. If the beta value equals to 1, the prices will not change. However, the share price is
more sensitive, the more the value of beta are increasing. The beta value of less than 1 implies
that the fluctuation I market return is lower than the company’s performance. The risk of the
company is low as the value of beta is less than 1.

Recommendation
The CAPM model is used to calculate the cost of capital, it is as follows:
𝐾𝑒 = 𝑅𝑓 + 𝛽 (𝑅𝑚 − 𝑅𝑓 )

The risk-free return can be taken from the government bonds, and the market premium in excess
of index return over the risk-free instruments. The current interest rates on government account
are 5% and the index performance is 8%. The cost of capital can be estimated from these figures
as follows:
Ke = 5% + 0.94 ( 8% - 5%) = 7.82%

The market price of a share is $50, the PE ratio is 13 (Yahoo Finance, 2019). The current cost of
equity gives an expected EPS of (50*7.82%) = 3.91. The calculated PE ratio will be 12.78 which
is close but lesser than the current PE ratio. This signifies that the stock is slightly underpriced. It
is recommended that the stock should be purchased.
References
Deloitte. (2019, May 1). 2019 Banking Industry Outlook. Retrieved from Deloitte:
https://www2.deloitte.com/us/en/pages/financial-services/articles/banking-industry-
outlook.html

WSJ. (2019, May 1). 2019 Banking Sector Outlook. Retrieved from WSJ:
https://deloitte.wsj.com/cio/2019/02/21/2019-banking-sector-outlook/

Yahoo Finance. (2019, May 1). The Bank of New York Mellon Corporation (BK). Retrieved from
Yahoo Finance: https://finance.yahoo.com/quote/BK/
Appendix:

Figure 1: Share price for a day. Source - Yahoo Finance

Figure 2: Share price for a Month. Source - Yahoo Finance

Figure 3 Share price for a Year. Source - Yahoo Finance

Figure 4Share price for 5 Years. Source - Yahoo Finance