Managerial Finance Essay

ASSIGNMENTBMMF5103MANAGERIAL FINANCE15 July 2013QUESTION 1a) Maximizing stockholder wealth is a moral imperative for fiscal manager mover managers be supposed to work for stockholders who are the real(a) knowledgeers of a f prizernity or com scoreisontnership. Shareholders elect go with directors who in enactment hire managers to run the f localisernity on day to day floor with the view to harbor attain for the fellowship. Managers are paid for their services evidenceed to the company whereas the dispenseholders own the company. As much(prenominal) morally managers should pursue policies that enhance shareholder esteem with the primary objective foc applyd on stockholder wealth maximization.b) Managers make key day-to-day decisions to maximize shareholder economic value. But how do the owners of a phone line know that managers are ope proportionalitynal to maximize shareholder value? This lack of information is known as the principal-agent problems. The agent perf orms the tasks on shareholders behalf yet the shareholders cannot ensure that the agent performs precisely the way the shareholders would like.Agency be as link to a corpoproportionn refers to the make ups of preventing agents (e.g. managers) pursuing their own raises at the expense of shareholders. There might be conflicts mingled with shareholders and the company managers. Shareholders who are owners want the managers to make decisions which exit join on the share value. Managers who be pose salaries prefer to expand the railway line with the view to increase their salaries which may not necessarily increase the share value. Thus, agency costs tend to slack the value of a corpoproportionn beca practice session the rising costs make the share footing low when at that place is substantial debt involved. Costs of monitoring willing increase and thus reduce wealth maximization of shareholders.c) Business morality is the acceptable institute of moral values and corpo fo otstep standards of conduct in running a business organization. It includes proper business policies and practices such(prenominal) as corpo locate governance, as a check against insider trading, bribery, discrimination and covers corpo pasture companionable responsibility and fiduciary responsibilities. Business ethics is a basic simulation providing proper conduct, it may be guided by law or put in placeso as to gain public confidence and acceptance.An framework of business ethics is when an employee lie to a potential client to get him to sign for services or purchase the product offered.Business ethics is important to a corpo proportionalityn because it will determine its reputation. It will retain public confidence towards the corpo symmetryn. It is essential for the long-term survival and success of the can in business. Implementing an ethical program will foster a successful corporation culture, values and enhanced profit susceptibility. Business ethics will also infl uence the way the corporations conduct its business and affect all including customers, employees, suppliers, competitors, etc.d) Advantagesi) There is no maturity stream in familiar stock. Thus, eliminating proximo re giftment obligation and enhances the desirability of park stock financing. ii) There is no obligation for refundment of the funds. Instead, there are others to share the peril of the business investment with. Since there is no debt obligation, there is no finance fee. iii) issuing common stock can increase unfalterings borrow power.The more common stock is stir, the larger the familys rightfulness base. Therefore, the more easily and cheaply long-term debt financing can be obtained. iv) Once capital is raised through stock, the corporation is free to use the proceeds in any way it pleases.Disadvantagesi) Involves high cost.It may be the most expensive form of long-term financing. Dividends are not tax-deductible and common stock is a riskier  guaran tor than either debt or best-loved stock.ii) potential effects of dilution on earnings and voting power. When a company or corporation issues more shares, its pecuniary results must be divided by a larger number of shares, causing dilution. This is because make outing of shares of the company means giving each investor a piece of self-command. Because they own the share of the company, the investors drop the right to demand explanations and justifications for business decisions.iii) Market perception that management think. instruction issues involve examining perceptions about management and perceptions by management. It includes various judgments regarding the competence of period and future management team as well as issues related to insider buying such as future strategies to increase operations and food market share.When management makes large purchases of their own stock with private funds, investors may get that the company is undervalued or that a favorable company event will occur soon.e) The three main users of ratio outlinei) OwnersThe owners of a firm are mainly careed in the firms profitability, fluidness and hence survival. Therefore, they need financial ratios to test the performance of their company such as profitability ratios to find outwhether management is able to convert gross tax dollars into profits and cash flow. The common ratios are gross allowance account, operating boundary line and net income edge. The gross beach is the ratio of gross profits to gross revenue. The operating margin is the ratio of operating profits to sales and net income margin is the ratio of net income to sales. The overtake-on-asset ratio, which is the ratio of net income to positive assets, measures a companys effectiveness in deploying its assets to generate profits. The return-on-investment ratio, which is the ratio of net income to shareholders equity, indicates a companys ability to generate a return for its owners. These ratios are use ful to owners of companies.ii) CreditorsCreditors are interested in a firms ability to dedicate their debts over a short period of time.The ratio analysis will evaluate the firms liquidity position. Creditors use liquidity ratio, which is the ratio of current assets to current liabilitiestogauge the ability of the company to pay its short-term bills. A ratio of greater than one is usually a minimum because anything less(prenominal) than one means the company has more liabilities than assets.iii) solicitudeManagement team comprising financial managers regularly use ratio analysis to evaluate financial policies and decisions they pick out made. It is the overall responsibilities of the management team to make sure available resources are apply most effectively and efficiently and that the financial positions of the company is sound.Management uses profitability ratios to analyze the companys ability to convert sales dollars into profits and cash flow. For example, the return- on-investment ratio, which is the ratio of net income to shareholders equity, indicates a companys ability to generate a return for its owners.Examples of ratio formulaExample 1 rough margin ratioGross edge =Gross ProfitgrossGross profit and revenue figures are obtained from the income statement of a business. Alternatively, gross profit can be figure by subtracting cost of goods sold from revenue. Thus gross margin formula may be re verbalize as Gross Margin =Revenue Cost of Goods SoldRevenueExample 2 Operating margin ratioOperating income is same as earnings beforehand interest and tax. Operating income and revenue figures is available from the income statement of a company. Operating Margin =Operating IncomeRevenueQUESTION 2a) There are fiver different categories of financial ratios. They arei) Liquidity ratio is used to measurecompanys ability to pay its short-term debt obligations. As such, they focus on the firms current assets and current liabilities on the balance shee t.The most common liquidity ratios used is the current ratio mainly to give an base of the companys ability to pay back its short-term liabilities such as debt and account payables with its short-term assets such as cash, fund and receivables.ii) Debt ratio is used to measure companys ability to meet its long-term debt obligations. The ratio indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.iii) fiscal leverage ratio measure the extent to which a business or investor is using the borrowed money. A company having high leverage is considered to be at risk of bankruptcy in the event the company is unable to regress the debts. The most common financial leverage ratio is the debt-to-equity ratio calculated as total debt divided by shareholders equityiv) Asset talent or disturbance ratios measure the efficiency a company uses its as sets to heighten sales. The most common asset efficiency ratios are the inventory upset ratio, the receivables turnover ratio, the days sales in inventory ratio, the days sales in receivables ratio, the net working capital ratio, the fixed asset turnover ratio, and the total asset turnover ratio.v) The profitability ratios measure the companys ability to generate aprofit and an adequate return on assets and equity. The ratios measure how efficiently the firm uses its assets and how effectively it manages its operations. An example is the Net profit margin ratio is a ratio of profitability calculated as after-tax net income (net profits) divided by sales (revenue). It shows the amount of each sales dollar left over after all expenses have been paid.Limitations of financial ratiosi) Although financial ratios can be effective tools for gauging financial performance and managerial effectiveness, they rarely provide answers. balances will not say why something is departure wrong and what to do about a particular situation they provided pinpoint where a problem is.ii) There is no international standards on the use of financial ratios. Limitation of ratios interpretation emerges when a particular set of ratios of a company is compared to other company or business. For example, for calculating the inventory turnover one company may use the cost of goods sold as the numerator, darn another may use its sales figures. A company may use the operating profit to calculate its total assets turnover, while another may use the net income after taxes.iii) bench mark for assessing companys financial position is needed. Different operating methodologies may be employed to run a company may render the comparison of financial ratios ir applicable. Example, a company prefers to lease most of its assets while another company may own them. Thus, some of the ratios, such as debt to total assets, fixed-charge coverage, total assets turnover, and return on total assets, would be unr elated.iv) The rising prices factor can make the ratio of a particular company look good or bad. Inventory turnover may have deteriorated over a three-year period the problem may not receivable to the increase in physical inventory, but rather, to increase in the cost of the goods.b) Effect of an increase in a companys debt ratio to its return on equity.An increase on debt-ratio will be increase in the return of equity. If a company finances itself through debt, the creditors elevate the risk. If the debt results in increased earnings, the return on shareholder investment is exponential. kernel liabilities include both the current and non-current liabilities. The formula to calculate the debt ratio is Debt Ratio = amount LiabilitiesTotal AssetsReturn on Equity is expressed as a percentage and calculated asROE = Net Income/ common Equityc) Long-term interest rate = (RM13,000,000) (8/ snow) = RM1,040,000 Short-term interest rate = RM1,300,000 RM1,040,000 = RM260,000 Short-term i nterest rate = RM260,000/RM1,546,000 = 0.168Rate of interest on notes payable is 16.8%d) Changes in value of equity (in millions)(RM in millions)Shareholders beginning equity537Shareholders endpoint equity485Difference beginning & ending equity52Net income128Less Paid dividends57Difference71 livestock/shares purchased in the year (52+71)123Shares purchased throughout the year is RM123 millione) If the current ratio of corporation is 5.65 when industry average is 1.42, this disparity means that the corporation is havingi) an superfluity build-up in inventory. When the corporation holds a high level of inventory, it ties up business funds that could have been used in other areas such as in development or marketing. The cost of the inventory is not corned by the corporation until it sells the inventory.ii) aged account receivables which is the amounts owed to the company by its customers. The corporations account receivables reports will rate problems with receivables management process and identify accounts that require collection action.QUESTION 3a) Although ownership of stock re registers ownership in a company, not all stock is created equal. Therefore there are two basic types of stock common stock and preferable stock. favourite(a) stock is sometimes referred to as a hybrid security because it has features of common stocks and adherences. A companys preferred stock trades respectively of its common stock and offers preferred stockholders a different set of benefits. Preferred stocks paid amount of dividends just as fixed interest alliance. It is not debt but equity like common stocks.b) Preferred stock par value of RM100 with annual dividend 10%. Annual rate of return is 11.5%. i) RM100 X10/100% = RM10.Yield of 11.5%11.5%/100 = 0.115= RM86.96ii) As the risk-free rate increases, the required rate of return will increase and the price will drop. When grade increase, the price of the preferred stock will likely fall. If price falls, the issuer wi ll likely call the preferred stock and replace it with a new preferred stock issue at a start rate, conventional debt, or perhaps even common stockc) RM4.63(1+0.05)/(0.12-0.05) = 4.8615/0.07 = 69.46The value of the companys stock if the required rate of return is 12% is RM69.46d) Before dislodge in price per share, r =5% + (8% -5%) beta 1.3 = 8.9%After swop in price per share, r = 4% + (10% 4%) 1.5 = 13%Therefore, the neuter in price per share is RM4.87e) Formula for constant growth is rs = r RE + (rm rRE)b= 6% + 5% (1.4) = 13%2013 = RM0 dividen2015 = RM1.002016 = RM1.00 (1.2) = RM1.202017 = RM1.00 RM1.442018 = RM1.00 RM1.7282019 = RM1.00 RM1.849Calculate growth between constant rate=The price of the stock is RM20.16QUESTION 4a) needfully RM40,000/year during retirement periodn = 10 yrs, i = 9 %PVA = PMT (PVIFA) = RM40,000 (9.129) = RM365,160PV = RM365,160 (0.422) = RM154,097.52The Mirians should deposit RM154,097.52b) Model A PV = PMT (PVIFA) = RM5,000 (3.993) = RM19,965Mode l B social classPayment (RM)PVIFPV17,0000.9266,48226,0000.8575,14235,0000.7943,97044,0000.7352,94053,0000.6812,043Total20,577I would purchase/buy type A because it is cheaper by RM612 compared to model B.c) Which option to be chosen?Option 1PMT = RM3,500/2.487 = RM1,407,318.05Option 2PMT = RM3,500/3.102 = RM1,128,304.32Option 3PMT = RM3,500/3.605 = RM970,873.79The company should choose option 3 because write down by RM157,430.53 compared to option 2 which is second lowestd) Present value is exact invest of the compound interest computations. Applying compound interest calculation is to find the future value of a present amount. Using the present value calculation a present value amount is tack together to be received in future.e) Over certain period the article of belief amount increases as a result of the installment payments resulting in lower amount of interest that is charged by the bank.QUESTION 5a) When an investor buys a hold, the investor is lending money to the mystify issuer, which could be a government, corporation, etc. The issuer promises to pay a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it matures, or comes payable after a set period of time. Thus bonds provide interest payment and principal payment. Payment of interest is done annually or semi-annually. Coupon payments are paid periodically. When bond matures a principal gibe is paid which is a lump sum payment.b) Bond prices and interest judge are related. Interest rates and bond prices have inverse relationship, when one goes up, the other goes down. If interest rates is high abundant, bond prices would fall. If interest rates is low, bond prices would rise. Prices of short-term bonds do not fluctuate more often compared to long-term bond. Premium bond is sold when the stated rate of interests exceed the required rate of return.Example, if rates dropped to below original coupon rate o f 7% for RM1,000 bond, it would be priced at a premium since it would be carrying a higher interest rate than what was currently available in the market. A bond will sell at a discount when the stated rate of interest is less than the required return. Bond is sold equal to the par value when the stated rate of interest is equal to the required return.c) Param does not have enough money to buy 10 bonds if the required rate of return is 9%. This is because the required rate of return which is 9% is less than the coupon rate of the bond which is 10%. The price of the bond is greater than the par value of RM1,000. Considering there are 10 bonds, the total price is greater than RM10,000. That is the tenableness why Param would not have enough money to buy the 10 bonds.d) FV = RM1,000PMT =150N = 10PV = RM1,2501/YR = 10.79%e) Interest rate risk is the risk of decline in bond values due to the increase in interest whereas reinvestment risk is the risk of an income decline due to a drop in interest rates. Bond holders who bought long-term bond is greatly at risk to the interest rate risk.QUESTION 6a) (RM18+RM4+RM3+RM2-RM24)/24 X 100% = 12.5%.Therefore, Billie jeans realized rate of return during the three years holding period is 12.5%b) (i) express 18 + 0.8 (12 8) = 11.2%Stock 28 + 1.2 (12 8) = 12.8%Stock 38 + 0.6 (12 8) = 10.4%(ii) Stock 3 is undervalued due since E (R) RRc) genus Beta is the measurement for market risk which is non-diversifiable. The risk must be dealt with by the portfolio manager. Diversifiable risk should be modify away by portfolio manager so that it would not pose a problem to the investment. As such all market risks is all relevant to the portfolio manager since it is his job and responsibility in balancing the likely risk and return.d) The situation suggest that investors are more risk adverse compared to before the shift taking place. On the portfolio, a risk premium of 11% (16% 5%) is required whereas previously 10% (15% 5%). If slop e were to change downward, it means investors are less aversion to risk.e) Expected return 0.9(12%) + 0.1 (20%) = 12.8%Beta 0.9(1.2) + 0.1(2.0) = 1.28%