Managerial Finance Essay

ASSIGNMENTBMMF5103MANAGERIAL conciliate15 July 2013 motion 1a) maximising sh atomic number 18holder riches is a less(prenominal)on imperative for mo meshary charabanc gist theatre directors are supposed to work for percentholders who are the actual owners of a companion or bay window. Shareholders elect guild directors who in curve hire managers to run the social club on day to day basis with the watch over to dispatch meshwork for the phoner. Managers are pull down offing(a) for their services rendered to the companion whereas the shareholders own the c on the wholeer-up. As such(prenominal) morally managers should pursue policies that provoke shareholder regard as with the primary accusative foc affair on timewornholder wealth maximization.b) Managers make key day-to-day decisions to increase shareholder lever. But how do the owners of a military control know that managers are run to maximize shareholder entertain? This escape of information is k nown as the principal- cistron problems. The factor performs the tasks on shareholders behalf yet the shareholders give the bounce non ensure that the agent performs precisely the way the shareholders would ex exchangeable.Agency approach as related to a corpo balancen refers to the be of pr offspringing agents (e.g. managers) pursuing their own engages at the expense of shareholders. in that respect might be conflicts amongst shareholders and the smart set managers. Shareholders who are owners penury the managers to make decisions which go out increase the share nurture. Managers who receive salaries prefer to expand the seam with the view to increase their salaries which whitethorn not necessarily increase the share value. Thus, dresser costs tend to decrease the value of a corpo dimensionn because the rising costs make the share determine busted when in that respect is substantial debt assumed. hails of observe go away increase and thus flinch wealth maxim ization of shareholders.c) melody morality is the accept fitted set of moral determine and bodily standards of conduct in caterpillar tread a clientele organization. It includes proper bank line policies and practices such as corpo tempo governance, as a check against insider trading, bribery, discrimination and covers corpo respect social responsibility and fiduciary responsibilities. Business morality is a basic exemplarling providing proper conduct, it whitethorn be guide by law or impute in placeso as to gain reality confidence and acceptance.An character of channel ethics is when an employee lie to a potential customer to get him to sign for services or purchase the product offered.Business ethics is important to a corpo symmetryn because it leave behind determine its reputation. It allow give earthly concern confidence towards the corpo symmetryn. It is essential for the long-term survival of the fit sort and success of the corpo dimensionn in occupation. Implementing an honourable program leave alone foster a successful corpo proportionalityn culture, determine and deepen pelf superpower. Business ethics volition excessively influence the way the corpo symmetryns conduct its business and affect all including customers, employees, suppliers, competitors, and so forthd) Advantagesi) in that location is no maturity period in greens extend. Thus, eliminating future getment promise and enhances the desir energy of habitual line financing. ii) there is no obligation for repayment of the funds. Instead, there are others to share the insecurity of the business investment with. Since there is no debt obligation, there is no finance fee. iii) Issuing greensality melodic phrase can increase crockeds borrowing power.The more common comport is change, the bigger the firms equity base. Therefore, the more easily and stingily long-term debt financing can be obtained. iv) Once capital is raised done stock, the corpo symmet ryn is free to use the talk in any way it p accepts.Disadvantagesi) Involves mettlesome cost.It may be the roughly high-priced form of long-term financing. Dividends are not tax-deductible and common stock is a riskier security system than either debt or preferred stock.ii) potential difference effects of dilution on earnings and balloting power. When a companionship or corpo symmetryn issues more shares, its monetary end points must(prenominal) be divided by a larger number of shares, causing dilution. This is because selling of shares of the family manner giving each investor a piece of ownership. Because they own the share of the beau monde, the investors oblige the right to demand explanations and justifications for business decisions.iii) securities diligence perception that counseling think. Management issues involve examining perceptions or so management and perceptions by management. It includes divers(a) judgments regarding the competence of menstruum and future management group as well as issues related to insider buying such as future st dictategies to increase operations and market share.When management makes large purchases of their own stock with private funds, investors may feel that the caller-out is undervalued or that a favorable society event will occur soon.e) The collar main users of ratio analysisi) OwnersThe owners of a firm are mainly evoke in the firms profit baron, fluidity and hence survival. Therefore, they need financial ratios to test the performance of their keep company such as profitability ratios to figure outwhether management is able to convert gross sales dollars into pelf and currency flow. The common ratios are gross allowance account, operational(a) perimeter and earnings income income margin. The gross margin is the ratio of gross profits to sales. The operating margin is the ratio of operating profits to sales and net income margin is the ratio of net income to sales. The deport -on- summation ratio, which is the ratio of net income to entirety assets, touchstones a companys metier in deploying its assets to gene treasure profits. The move over-on-investment ratio, which is the ratio of net income to shareholders equity, indicates a companys ability to genepace a decease for its owners. These ratios are useful to owners of companies.ii) CreditorsCreditors are involutioned in a firms ability to pay their debts over a lilliputian period of time.The ratio analysis will evaluate the firms fluidnessposition. Creditors use liquidity ratio, which is the ratio of watercourse assets to current liabilitiestogauge the ability of the company to pay its short bills. A ratio of greater than one is usually a stripped because anything less than one means the company has more liabilities than assets.iii) ManagementManagement team comprising financial managers regularly use ratio analysis to evaluate financial policies and decisions they create made. It is the ov erall responsibilities of the management team to make sure open resources are used 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 devolve-on-investment ratio, which is the ratio of net income to shareholders equity, indicates a companys ability to gene consec graze a return for its owners.Examples of ratio manifestationExample 1 coarse margin ratio unrefined bound =Gross ProfitRevenueGross profit and revenue figures are obtained from the income tilt of a business. Alternatively, gross profit can be work out by subtracting cost of goods change from revenue. Thus gross margin formula may be restated as Gross leeway =Revenue Cost of Goods SoldRevenueExample 2 operational margin ratioOperating income is same as earnings onward participation and tax. Operating income and revenue figures is availa ble from the income statement of a company. Operating Margin =Operating IncomeRevenueQUESTION 2a) There are five disequationate categories of financial ratios. They arei) Liquidity ratio is used to broadsidecompanys ability to pay its short-term debt obligations. As such, they focus on the firms current assets and current liabilities on the balance sheet.The most common liquidity ratios used is the current ratio mainly to give an idea of the companys ability to pay stake its short-term liabilities such as debt and payables with its short-term assets such as cash, armory 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 congeneric to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company impudences in terms of its debt-load.iii) Financial leverage ratio measure the extent to which a business or investor is usi ng the borrowed property. A company having high leverage is considered to be at risk of bankruptcy in the event the company is unable to repay the debts. The most common financial leverage ratio is the debt-to-equity ratio calculated as constitutional debt divided by shareholders equityiv) asset cleverness or overturn ratios measure the efficiency a company uses its assets to arrive at sales. The most common asset efficiency ratios are the lineage disturbance ratio, the receivables overthrow 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 gene evaluate 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 unclutter profit margin ratio is a ratio of profitability cal culated as aft(prenominal)-tax net income (net profits) divided by sales (revenue). It shows the substance of each sales dollar left over afterward all expenses have been remunerative.Limitations of financial ratiosi) Although financial ratios can be effective tools for gauging financial performance and managerial effectiveness, they rarely abide answers. Ratios will not say wherefore something is going wrong and what to do about a particular situation they only if 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 work out the inventory turnover one company may use the cost of goods sold as the numerator, while another(prenominal) 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 tax es.iii) Benchmark for assessing companys financial position is needed. Different operating methodologies may be employed to run a company may render the comparison of financial ratios irrelevant. 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 unrelated.iv) The lump factor can make the ratio of a particular company tincture good or bad. Inventory turnover may have deteriorated over a three- class period the problem may not receivable to the increase in somatogenic 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 by debt, the creditors shoulder the risk. If the debt results in increased earnings, the return on shareholde r investment is exponential. match liabilities include both the current and non-current liabilities. The formula to calculate the debt ratio is Debt Ratio = conglomeration Liabilities chalk up AssetsReturn on integrity is expressed as a division and calculated asROE = Net Income/Common Equityc) Long-term pursuit rate = (RM13,000,000) (8/ snow) = RM1,040,000 Short-term wager rate = RM1,300,000 RM1,040,000 = RM260,000 Short-term cheer rate = RM260,000/RM1,546,000 = 0.168 compute of affaire on notes payable is 16.8%d) Changes in value of equity (in one million millions)(RM in millions)Shareholders offshoot equity537Shareholders ending equity485 residuum beginning & ending equity52Net income128Less Paid dividends57Difference71 argument/shares purchased in the year (52+71)123Shares purchased throughout the year is RM123 millione) If the current ratio of commode is 5.65 when industry average is 1.42, this disparity means that the potty is havingi) an excess build-up in invento ry. 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 recovered by the corporation until it sells the inventory.ii) aged account receivables which is the issue forths owed to the company by its customers. The corporations account receivables reports will recognise problems with receivables management process and identify accounts that require collection action.QUESTION 3a) Although ownership of stock re affords ownership in a company, not all stock is created adjoin. Therefore there are cardinal basic types of stock common stock and preferred stock. Preferred stock is sometimes referred to as a hybrid security because it has features of common stocks and stings. A companys preferred stock trades independently of its common stock and offers preferred stockholders a diverse set of benefits. Preferred stocks paid amount of dividends just as fixed interest bond. 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. ease up of 11.5%11.5%/100 = 0.115= RM86.96ii) As the risk-free rate increases, the necessitate rate of return will increase and the price will drop. When rank increase, the price of the preferred stock will presumable fall. If price falls, the issuer will likely call the preferred stock and step in it with a new preferred stock issue at a dispirit 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 infallible rate of return is 12% is RM69.46d) Before change in price per share, r =5% + (8% -5%) beta 1.3 = 8.9%After change in price per share, r = 4% + (10% 4%) 1.5 = 13%Therefore, the change in price per share is RM4.87e) Formula for constant yield is rs = r RE + (rm rRE)b= 6% + 5% (1.4) = 13%2013 = R M0 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) Needs 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 beat RM154,097.52b) Model A PV = PMT (PVIFA) = RM5,000 (3.993) = RM19,965Model BYear remuneration (RM)PVIFPV17,0000.9266,48226,0000.8575,14235,0000.7943,97044,0000.7352,94053,0000.6812,043Total20,577I would purchase/buy model A because it is cheaper by RM612 compared to model B.c) Which survival 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 lower by RM157,430.53 compared to option 2 which is second lowestd) Present value is exact invest of the compound interest deliberatenesss. Applyi ng compound interest calculation is to find the future value of a present amount. Using the present value calculation a present value amount is found to be received in future.e) Over certain period the tenet 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 bond, the investor is lending money to the bond 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 due after a set period of time. Thus bonds lead interest payment and principal payment. Payment of interest is done annually or semi-annually. Coupon payments are paid periodically. When bond matures a principal sum is paid which is a lump sum payment.b) bond prices and interest rates are related. recreate rates and bond prices hav e opposition relationship, when one goes up, the other goes down. If interest rates is high plenteous, bond prices would fall. If interest rates is low, bond prices would rise. Prices of short-term bonds do not fluctuatemore frequently compared to long-term bond. Premium bond is sold when the stated rate of interests exceed the necessary rate of return.Example, if rates dropped to below schoolmaster coupon rate of 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. bring together is sold equal to the par value when the stated rate of interest is equal to the required return.c) Param does not have tolerable 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 pri ce 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 source why Param would not have enough money to buy the 10 bonds.d) FV = RM1,000PMT =clN = 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 keeping period is 12.5%b) (i)Stock 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) Beta is the amount for market risk which is non-diversifiable. The risk must be dealt with by the portfolio manager. Diversifiable risk should be diversified away by port folio 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 equilibrate the likely risk and return.d) The situation show that investors are more risk ominous 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 slope were to change downward, it means investors are less aversion to risk.e) pass judgment return 0.9(12%) + 0.1 (20%) = 12.8%Beta 0.9(1.2) + 0.1(2.0) = 1.28%