IBM’s financial market performance essay

In actuality, IBM’s financial market performance is characterized by positive trends after the consistent decline in 2008. At the same time, the development of the company is quite successful, taking into consideration the impact of the economic recession on the market and customer behavior. In such a situation, the company and investors have to assess adequately risks IBM can face in the nearest future to assess adequately the cost of equity and expected returns on investments. As the matter of fact, IBM has proved to be a reliable company but the ongoing deterioration of the economic situation may cause a considerable downturn in the development of the company. In such a context, the adequate risk assessment is crucial that makes beta coefficient extremely important for IBM and its investors as well as for other companies.

First of all, it is important to place emphasis on the fact that beta coefficient is essential for the assessment of the company’s risks compared to overall risks in the market. In this regard, the unfavorable economic situation is particularly important in regard to beta coefficient of IBM because the company deteriorated its financial performance in the late 2008 but the overall deterioration of the situation in the market was even more serious. Moreover, today, the situation in the market is still unclear and uncertain. As a result, forecasts of specialists (Carter, 2003) can vary consistently from pessimistic to optimistic. Nevertheless, the general assessment of the situation in the high tech IT market is basically positive. In this regard, the position of IBM is particularly strong due to the long history of the company and its dominant position in the market. In fact, the company can use the power of its brand and its international network to maintain the current economic recession and to pass through the current economic crisis well enough. At any rate, today, beta coefficient of IBM is close to 0,85, whereas the average beta coefficient in the market hardly reaches 0,8. In such a way, the financial performance of IBM is better compared to the average financial performance in the market and risks associated with the development of IBM and investments in IBM are lower compared to average risks in the industry.

At the same time, beta coefficient comprises an integral part of the capital asset pricing model, which helps to define the cost of equity of IBM. CAPM reveals the fact that the cost of equity for IBM is 8.95% (CAPM = 3% (risk rate) + 0,85 (beta coefficient) * (10% (expected market return) – 3% (risk rate))= 8.95%). In such a way, investors can count for a stable cost of equity that makes their investments secure. On the other hand, they will not receive high profits after investing in IBM but, in case of investments in the company, their investments will be secured.

In this regard, other companies operating in the industry demonstrate similar trends. For instance, the cost of equity for HPQ and Dell comprise 7.75% and 8.80% respectively. In such a way, IBM is in a good competitive position. At any rate, the company is still attractive for investors and they can expect obtaining profits with relatively low risks associated with investments in the company. Therefore, IBM is worth investing in.