Assignment

BMMF5103
MANAGERIAL FINANCE

15 July 2013

Question 1

a ) Maximizing stockholder wealth is a “moral imperative” for fiscal director means directors are supposed to work for stockholders who are the existent proprietors of a company or corporation. Stockholders elect company managers who in bend hire directors to run the company on twenty-four hours to twenty-four hours footing with the position to do net income for the company. Directors are paid for their services rendered to the company whereas the stockholders own the company. As such morally directors should prosecute policies that enhance stockholder value with the primary aim focused on shareholder wealth maximization.

B ) Directors make cardinal daily determinations to maximise stockholder value. But how do the proprietors of a concern know that directors are runing to maximise stockholder value? This deficiency of information is known as the principal-agent jobs. The agent performs the undertakings on shareholders’ behalf yet the stockholders can non guarantee that the agent performs exactly the manner the stockholders would wish.

Agency costs as related to a corporation refers to the costs of forestalling agents ( e. g. directors ) prosecuting their ain involvements at the disbursal of stockholders. There might be struggles between stockholders and the company directors. Stockholders who are proprietors want the directors to do determinations which will increase the portion value. Directors who receive wages prefer to spread out the concern with the position to increase their wages which may non needfully increase the portion value. Thus. bureau costs tend to diminish the value of a corporation because the lifting costs make the portion monetary value depression when there is significant debt involved. Costss of monitoring will increase and therefore cut down wealth maximization of stockholders.

degree Celsius ) Business moralss is the acceptable set of moral values and corporate criterions of behavior in running a concern organisation. It includes proper concern policies and patterns such as corporate administration. as a cheque against insider trading. graft. favoritism and screens corporate societal duty and fiducial duties. Business ethics is a basic model supplying proper behavior. it may be guided by jurisprudence or put in placeso as to derive public assurance and credence.

An illustration of concern moralss is when an employee prevarication to a possible client to acquire him to subscribe for services or buy the merchandise offered.

Business moralss is of import to a corporation because it will find its repute. It will give public assurance towards the corporation. It is indispensable for the long-run endurance and success of the corporation in concern. Implementing an ethical plan will further a successful corporation civilization. values and enhanced profitableness. Business moralss will besides act upon the manner the corporations conduct its concern and impact all including clients. employees. providers. rivals. etc.

vitamin D ) Advantages

I ) There is no adulthood period in common stock. Therefore. extinguishing future refund duty and enhances the desirableness of common stock funding. two ) There is no duty for refund of the financess. Alternatively. there are others to portion the hazard of the concern investing with. Since there is no debt duty. there is no finance fee. three ) Publishing common stock can increase firm’s borrowing power. The more common stock is sold. the larger the firm’s equity base. Therefore. the more easy and cheaply long-run debt funding can be obtained. four ) Once capital is raised through stock. the corporation is free to utilize the returns in any manner it pleases.

Disadvantages
I ) Involves high cost. It may be the most expensive signifier of long-run funding. Dividends are non tax-deductible and common stock is a riskier security than either debt or preferable stock.

two ) Potential effects of dilution on net incomes and voting power. When a company or corporation issues more portions. its fiscal consequences must be divided by a larger figure of portions. doing dilution. This is because selling of portions of the company means giving each investor a piece of ownership. Because they own the portion of the company. the investors have the right to demand accounts and justifications for concern determinations.

three ) Market perceptual experience that direction think. Management issues involve analyzing perceptual experiences about direction and perceptual experiences by direction. It includes assorted judgements sing the competency of current and future direction squad every bit good as issues related to insider purchasing such as future schemes to increase operations and market portion. When direction makes big purchases of their ain stock with private financess. investors may experience that the company is undervalued or that a favourable company event will happen shortly.

vitamin E ) The three chief users of ratio analysis

I ) Owners:
The proprietors of a house are chiefly interested in the firm’s profitableness. liquidness and hence endurance. Therefore. they need fiscal ratios to prove the public presentation of their company such as profitableness ratios to happen outwhether direction is able to change over gross revenues dollars into net incomes and hard currency flow. The common ratios are gross border. runing border and net income border. The gross border is the ratio of gross net incomes to gross revenues. The operating border is the ratio of runing net incomes to gross revenues and net income border is the ratio of net income to gross revenues. The return-on-asset ratio. which is the ratio of net income to entire assets. measures a company’s effectivity in deploying its assets to bring forth net incomes. The return-on-investment ratio. which is the ratio of net income to shareholders’ equity. indicates a company’s ability to bring forth a return for its proprietors. These ratios are utile to proprietors of companies.

two ) Creditors
Creditors are interested in a firm’s ability to pay their debts over a short period of clip. The ratio analysis will measure the firm’s liquidness place. Creditors use liquidness ratio. which is the ratio of current assets to current liabilitiestogauge the ability of the company to pay its short-run measures. A ratio of greater than one is normally a lower limit because anything less than one means the company has more liabilities than assets.

three ) Management
Management squad consisting fiscal directors on a regular basis use ratio analysis to measure fiscal policies and determinations they have made. It is the overall duties of the direction squad to do certain available resources are used most efficaciously and expeditiously and that the fiscal places of the company is sound. Management uses profitableness ratios to analyse the company’s ability to change over gross revenues dollars into net incomes and hard currency flow. For illustration. the return-on-investment ratio. which is the ratio of net income to shareholders’ equity. indicates a company’s ability to bring forth a return for its proprietors.

Examples of ratio expression:
Example 1: Gross border ratio
Gross Margin =
Gross Net income

Gross
Gross net income and gross figures are obtained from the income statement of a concern. Alternatively. gross net income can be calculated by deducting cost of goods sold from gross. Therefore gross border expression may be restated as: Gross Margin =

Gross ? Cost of Goods Sold

Gross

Example 2: Operating border ratio
Operating income is same as net incomes before involvement and revenue enhancement. Operating income and gross figures is available from the income statement of a company. Operating Margin =
Operating Income

Gross

Question 2

a ) There are five different classs of fiscal ratios. They are:

I ) Liquidity ratio is used to measurecompany’s ability to pay its short-run debt duties. As such. they focus on the firm’s current assets and current liabilities on the balance sheet. The most common liquidness ratios used is the current ratio chiefly to give an thought of the company’s ability to pay back its short-run liabilities such as debt and payables with its short-run assets such as hard currency. stock list and receivables.

two ) Debt ratio is used to mensurate company’s ability to run into its long-run debt duties. The ratio indicates what proportion of debt a company has comparative to its assets. The step gives an thought to the purchase of the company along with the possible hazards the company faces in footings of its debt-load.

three ) Financial purchase ratio step the extent to which a concern or investor is utilizing the borrowed money. A company holding high purchase is considered to be at hazard of bankruptcy in the event the company is unable to refund the debts. The most common fiscal purchase ratio is the debt-to-equity ratio calculated as entire debt divided by stockholders equity

four ) Asset efficiency or turnover ratios measure the efficiency a company uses its assets to bring forth gross revenues. The most common plus efficiency ratios are the stock list turnover ratio. the receivables turnover ratio. the days’ gross revenues in stock list ratio. the days’ gross revenues in receivables ratio. the net working capital ratio. the fixed plus turnover ratio. and the entire plus turnover ratio.

V ) The profitableness ratios step the company’s ability to bring forth a
net income and an equal return on assets and equity. The ratios step how expeditiously the house uses its assets and how efficaciously it manages its operations. An illustration is the Net net income border ratio is a ratio of profitableness calculated as after-tax net income ( net net incomes ) divided by gross revenues ( gross ) . It shows the sum of each gross revenues dollar left over after all disbursals have been paid.

Restrictions of fiscal ratios
I ) Although fiscal ratios can be effectual tools for estimating fiscal public presentation and managerial effectivity. they seldom provide replies. Ratios will non state why something is traveling incorrect and what to make about a peculiar state of affairs ; they merely pinpoint where a job is.

two ) There is no international criterions on the usage of fiscal ratios. Restriction of ratios reading emerges when a peculiar set of ratios of a company is compared to other company or concern. For illustration. for ciphering the stock list turnover one company may utilize the cost of goods sold as the numerator. while another may utilize its gross revenues figures. A company may utilize the operating net income to cipher its entire assets turnover. while another may utilize the net income after revenue enhancements.

three ) Benchmark for measuring company’s fiscal place is needed. Different runing methodological analysiss may be employed to run a company may render the comparing of fiscal ratios irrelevant. Example. a company prefers to rent most of its assets while another company may have them. Thus. some of the ratios. such as debt to entire assets. fixed-charge coverage. entire assets turnover. and return on entire assets. would be unrelated.

four ) The rising prices factor can do the ratio of a peculiar company look good or bad. Inventory turnover may hold deteriorated over a three-year period ; the job may non due to the addition in physical stock list. but instead. to increase in the cost of the goods.

B ) Consequence of an addition in a company’s debt ratio to its return on equity.

An addition on debt-ratio will be increase in the return of equity. If a company finances itself through debt. the creditors shoulder the hazard. If the debt consequences in increased net incomes. the return on stockholder investing is exponential. Entire liabilities include both the current and non-current liabilities. The expression to cipher the debt ratio is: Debt Ratio =

Entire Liabilitiess

Entire Assetss
Tax return on Equity is expressed as a per centum and calculated as:

ROE = Net Income/Common Equity

degree Celsiuss ) Long-run involvement rate = ( RM13. 000. 000 ) ( 8/100 ) = RM1. 040. 000 Short-run involvement rate = RM1. 300. 000 – RM1. 040. 000 = RM260. 000 Short-run involvement rate = RM260. 000/RM1. 546. 000 = 0. 168
Rate of involvement on notes collectible is 16. 8 %

vitamin D ) Changes in value of equity ( in 1000000s )

( RM in 1000000s )
Shareholders’ get downing equity
537
Shareholders’ stoping equity
485
Difference get downing & As ; stoping equity
52
Net income
128
Less: Paid dividends
57
Difference
71
Stock/shares purchased in the twelvemonth ( 52+71 )
123

Shares purchased throughout the twelvemonth is RM123 million

vitamin E ) If the current ratio of corporation is 5. 65 when industry norm is 1. 42. this disparity means that the corporation is holding:

I ) an extra build-up in stock list. When the corporation holds a high degree of stock list. it ties up concern financess that could hold been used in other countries such as in development or selling. The cost of the stock list is non recovered by the corporation until it sells the stock list.

two ) aged history receivables which is the sums owed to the company by its clients. The corporation’s history receivables studies will place jobs with receivables direction procedure and place histories that require aggregation action.

Question 3

a ) Although ownership of stock represents ownership in a company. non all stock is created equal. Therefore there are two basic types of stock: common stock and preferable stock. Preferred stock is sometimes referred to as a intercrossed security because it has characteristics of common stocks and bonds. A company’s preferable stock trades independently of its common stock and offers preferred shareholders a different set of benefits. Preferable stocks paid sum of dividends merely as fixed involvement bond. It is non debt but equity like common stocks.

B ) Preferred stock par value of RM100 with one-year dividend 10 % . Annual rate of return is 11. 5 % . I ) RM100 X10/100 % = RM10.

Output of 11. 5 %
11. 5 % /100 = 0. 115
= RM86. 96

two ) As the riskless rate additions. the needed rate of return will increase and the monetary value will drop. When rates increase. the monetary value of the preferable stock will probably fall. If monetary value falls. the issuer will probably name the preferable stock and replace it with a new preferable stock issue at a lower rate. conventional debt. or possibly even common stock

degree Celsius ) RM4. 63 ( 1+0. 05 ) / ( 0. 12-0. 05 ) = 4. 8615/0. 07 = 69. 46
The value of the company’s stock if the needed rate of return is 12 % is RM69. 46

vitamin D ) Before alteration in monetary value per portion. r =5 % + ( 8 % -5 % ) beta 1. 3 = 8. 9 %

After alteration in monetary value per portion. r = 4 % + ( 10 % – 4 % ) 1. 5 = 13 %

Therefore. the alteration in monetary value per portion is RM4. 87

vitamin E ) Formula for changeless growing is rs = R RE + ( rm – rRE ) B
= 6 % + 5 % ( 1. 4 ) = 13 %
2013 = RM0 dividen
2015 = RM1. 00
2016 = RM1. 00 ( 1. 2 ) = RM1. 20
2017 = RM1. 00 RM1. 44
2018 = RM1. 00 RM1. 728
2019 = RM1. 00 RM1. 849
Calculate growing between changeless rate
=

The monetary value of the stock is RM20. 16
Question 4

a ) Needs RM40. 000/year during retirement period
n = 10 year. i = 9 %
PVA = PMT ( PVIFA ) = RM40. 000 ( 9. 129 ) = RM365. 160
PV = RM365. 160 ( 0. 422 ) = RM154. 097. 52

The Mirians should lodge RM154. 097. 52

B ) Model A: PV = PMT ( PVIFA ) = RM5. 000 ( 3. 993 ) = RM19. 965
Model Bacillus:
Year
Payment ( RM )
PVIF
PV
1
7. 000
0. 926
6. 482
2
6. 000
0. 857
5. 142
3
5. 000
0. 794
3. 970
4
4. 000
0. 735
2. 940
5
3. 000
0. 681
2. 043
Sum:
20. 577

I would purchase/buy pattern A because it is cheaper by RM612 compared to pattern B.

degree Celsius ) Which option to be chosen?

Option 1
PMT = RM3. 500/2. 487 = RM1. 407. 318. 05
Option 2
PMT = RM3. 500/3. 102 = RM1. 128. 304. 32
Option 3
PMT = RM3. 500/3. 605 = RM970. 873. 79

The company should take option 3 because lower by RM157. 430. 53 compared to option 2 which is 2nd lowest

vitamin D ) Present value is exact invest of the compound involvement computations. Using compound involvement computation is to happen the future value of a present sum. Using the present value computation a present value sum is found to be received in future.

vitamin E ) Over certain period the rule sum additions as a consequence of the installment payments ensuing in lower sum of involvement that is charged by the bank.

Question 5

a ) When an investor buys a bond. the investor is imparting money to the bond issuer. which could be a authorities. corporation. etc. The issuer promises to pay a specified rate of involvement during the life of the bond and to refund the principal. besides known as face value or par value of the bond. when it “matures. ” or comes due after a fit period of clip. Therefore bonds provide involvement payment and chief payment. Payment of involvement is done yearly or semi-annually. Coupon payments are paid sporadically. When bond matures a chief amount is paid which is a ball sum payment.

B ) Chemical bond monetary values and involvement rates are related. Interest rates and bond monetary values have “inverse relationship” . when 1 goes up. the other goes down. If involvement rates is high plenty. bond monetary values would fall. If involvement rates is low. bond monetary values would lift. Monetary values of short-run bonds do non fluctuate more frequently compared to long-run bond. Premium bond is sold when the stated rate of involvements exceed the needed rate of return.

Example. if rates dropped to below original voucher rate of 7 % for RM1. 000 bond. it would be priced at a premium since it would be transporting a higher involvement rate than what was presently available in the market. A bond will sell at a price reduction when the stated rate of involvement is less than the needed return. Bond is sold equal to the par value when the stated rate of involvement is equal to the needed return.

degree Celsius ) Param does non hold adequate money to purchase 10 bonds if the needed rate of return is 9 % . This is because the needed rate of return which is 9 % is less than the voucher rate of the bond which is 10 % . The monetary value of the bond is greater than the par value of RM1. 000. Sing there are 10 bonds. the entire monetary value is greater than RM10. 000. That is the ground why Param would non hold adequate money to purchase the 10 bonds.

vitamin D ) FV = RM1. 000
PMT =150
N = 10
PV = RM1. 250
1/YR = 10. 79 %

vitamin E ) Interest rate hazard is the hazard of diminution in bond values due to the addition in involvement whereas reinvestment hazard is the hazard of an income diminution due to a bead in involvement rates. Bond holders who bought long-run bond is greatly at hazard to the involvement rate hazard.

Question 6

a ) [ ( RM18+RM4+RM3+RM2-RM24 ) /24 ] X 100 % = 12. 5 % .
Therefore. Billie jean’s realized rate of return during the three old ages keeping period is 12. 5 %

B ) ( I )
Stock 1
8 + 0. 8 ( 12 – 8 ) = 11. 2 %
Stock 2
8 + 1. 2 ( 12 – 8 ) = 12. 8 %
Stock 3
8 + 0. 6 ( 12 – 8 ) = 10. 4 %

( two ) Stock 3 is undervalued due since E ( R ) ? RR

degree Celsius ) Beta is the measuring for market hazard which is non-diversifiable. The hazard must be dealt with by the portfolio director. Diversifiable hazard should be diversified off by portfolio director so that it would non present a job to the investing. As such all market hazards is all relevant to the portfolio director since it is his occupation and duty in equilibrating the likely hazard and return.

vitamin D ) The state of affairs suggest that investors are more risk adverse compared to before the displacement taking topographic point. On the portfolio. a hazard premium of 11 % ( 16 % – 5 % ) is required whereas antecedently 10 % ( 15 % – 5 % ) . If incline were to alter downward. it means investors are less antipathy to hazard.

vitamin E ) Expected return: 0. 9 ( 12 % ) + 0. 1 ( 20 % ) = 12. 8 %
Beta: 0. 9 ( 1. 2 ) + 0. 1 ( 2. 0 ) = 1. 28 %