Risk Management and Diversification

The assignment provides a detailed analysis of risk management and diversification strategies, including a review of recent advances in risk assessment and risk management. It also explores the effectiveness of portfolio risk diversification, supply chain risk management, and the factors affecting dividend policy. The document is based on various research papers and online resources, providing a comprehensive understanding of these topics.

Financial Management

Table of Contents
INTRODUCTION................................................................................................................................3
MAIN BODY.......................................................................................................................................3
PART A.................................................................................................................................................3
a. Calculating the value of ordinary shares by applying appropriate model....................................3
b. Computation of ordinary value of the shares by using the model...............................................3
c. Model use for calculating the value of ordinary shares...............................................................4
d. Feature resulting in differing valuation of Millennium Tutoring. And additional information
required for garner confidence in the projections of analyst report ?..............................................4
PART B.................................................................................................................................................6
Risk management, one of the key component of the corporate finance..........................................6
Defining strategies for risk diversification in case of public consumer electronics company.........7
CONCLUSION....................................................................................................................................8
REFERENCES.....................................................................................................................................9

INTRODUCTION
Financial management means the activity that is concerned with procuring, raising,
administering and controlling of the funds within the business. It refers to the operational activity
that accounts for obtaining the funds and its utilization for conducting efficient business operations.
The present study is based on the valuation of the shares of the Millennium Tutoring and the crucial
aspects of the risk management. Furthermore, the study describes the systematic and the
unsystematic factors that are faced by the company and the strategies that company can use for
managing or diversifying the risk.
MAIN BODY
PART A
a. Calculating the value of ordinary shares by applying appropriate model.
In this case, Dividend model can be used for valuing the shares of Millennium Tutoring as it
is most suitable and appropriate method for this case because the entire dividend amount is being
paid off by the company due to its expectation of not attaining growth in the future ( Vizcaíno-
González, Iglesias-Antelo & Romero-Castro, (2019)). The value of the shares under the dividend
model is computed by dividing the dividend per share with the fair rate of return of the dividend.
Value of ordinary share-
Dividend per share- $1.50
Fair rate of return- 12% or 0.12
ordinary shares= Dividend per share/ Fair rate of return
= 1.50/0.12
= $12.5
b. Computation of ordinary value of the shares by using the model.
In this scenario, Earning model can be applied as it relates with the steady or the constant
growth of the Millennium Tutorial. Under this case, B reports that management is expecting of
distributing the dividend as 30% of the returns generated, so the earning method will be most
appropriate as it evaluates the value of the shares on the basis of the future maintainable profits and
the expected rate of the return. The ordinary value for the shares is computed by dividing the
dividend per share with the expected return.
Value of ordinary shares-
Earning per share- $1.50
Expected rate of return- 13% or 0.13
Ordinary shares= Earning per share/ Expected rate of return
= 1.50/0.13

= $11.53
c. Model use for calculating the value of ordinary shares.
For Millennium Tutoring, ordinary shares can be valued with the help of Dividend Growth
Model. As the earnings and dividends are expected to grow at a rate of 50 percent for over the next
year, 20 percent for the following two years which will revert back to constant growth rate of 9
percent thereafter to the company. As per the analyst Millennium Tutoring management has
announced the dividend payout of 30 percent of its business earnings to its current shareholders.
Dividend growth model is a method with the help of which the true and intrinsic value of a
stock excluding current market condition can be calculated. This model is used for determining the
intrinsic value of share based on the future time series of dividends which is growing at a constant
rate.
Value of ordinary shares
Particular Amount ($)
Growth Rate
Earning and Dividend growth rate:
1. Next year
2. Following next 2 years
Earning per share
9%
50%
20%
$1.50 per
share
Particular Amount ($)
Earning per share $1.50 per
share
Earning and Dividend growth rate
1. Next year @ 50% = (1.50 +
1.50*50%)
$ 2.25 per
share
2. Following next 2 years @ 20%
for 1st year = (2.25 + 2.25*20%)
for 2nd year = (2.7 + 2.7*20%)
$ 2.7 per share
$ 3.24 per
share
d. Feature resulting in differing valuation of Millennium Tutoring. And additional information
required for garner confidence in the projections of analyst report ?
Millennium Tutoring has been using different types of valuation methods for determining
the value of dividend and ordinary share value such as Dividend Yield Model, Earning Method.
With the use of different methods and model, valuation of dividend and ordinary shares always

come out with different values because of several features such as:
1. Stability of earnings: It is one of the most important aspect for every business organisation,
as it directly influence the overall profit distribution policy of the company (Belo, Collin ‐
Dufresne and Goldstein, 2015). If a company is having a regular source of income from its
business operations, then it is very easy for financial planner in formulation of dividend
distribution policy for the sake of investors and retention of earning amount for the benefit
of business growth and success in the future.
2. Financing policy: Dividend policy of company depends mainly on the financial
performance of the company. If company is having better growth and profit for a particular
year, than it results in framing of good dividend policy.
3. Dividend-policy of rivalry firms: Another important factor which affects the dividend
value is the amount of dividend distributed by the competitor company. If the rivalry firm is
distributing high rate of dividend, then investors will like to invest in that company.
Therefore, it is very important to consider the dividend-policy of competitive firm while
deciding owns.
4. Past dividend distribution rates: Dividend-policy for current year should be made by
considering the rate of dividend distributed in the past year. Stability in the rate of dividend
helps company in maintaining balance between growth and shareholder interest.
5. Growth needs of company: Retention of profit amount in the company helps in future
business expansion, business growth and development in the future time period
(Jagannathan and Liu, 2019). Company should always focus on maintaining a balance
between the amount of profit to be distributed and to be retained in the business.
For garnering the confidence in the projections of analyst report, following additional
information can be included:
1. Debt obligations: Company having high debt obligation is unable to pay dividend at high
rate to its shareholders. Instead, the company should focus on meeting its debt obligations
first and then focus should be made on retention of business profit for making business
growth better.
2. Legal requirements: During formulation of dividend-policy, company has to comply with
all legal obligation and requirement as laid down in the rules and companies act.
3. Corporate Taxation policy: Corporate tax plan affect the dividend rate of the company. If
the company is paying high rate of tax then it will reduce the overall profits which are
available for distribution to its shareholders. Government lays dividend tax on distribution
of dividends which also affect rate of dividend.

PART B
Risk management, one of the key component of the corporate finance
Risk management is the practice of assessing, controlling and identifying the threats that are
associated with the company's earnings and the capital. It is the process that helps in identifying the
loss exposures that are faced by the enterprise and choosing the most appropriate tools in treatment
of such exposures (Aven, 2016). It referred as the systematic way in ensuring the protection of the
resources of the business and the evaluation of the income against the losses which in turn leads to
the achievement of the aim, vision, mission and the goals of an entity.
Risk management plays a crucial role in the organization as it contribute towards the growth
of the company and creates stability with the assurance of the gaining the profitability in the future.
It is a crucial function for the organization as it helps in defining the future objectives of the
business. Risk management aims for managing the risk exposure and ensure the company to take
adequate risk that helps it in reaching its primary objectives (Ho and et.al., 2015). It acts as the
controlling function for the enterprise in respect of the risk attached. Risk management includes the
management of the systematic and the unsystematic risk factors that the company faces. With
reference to this study, It includes the risk factors that are faced by the public company when it opts
for investing in the electronic business.
Systematic risk means the risk that is caused due to the macro-economic factors in the
overall economy and cannot be controlled by the companies or the investors. The risk that causes
the fluctuation in returns of the stocks and the risky investments is considered as the systematic risk.
However, the unsystematic risk refers to the risk that occurs due to the micro-economic factors and
are counted as controllable risk (Bromiley and et.al., 2015). Unsystematic risk like the
mismanagement and the dispute among labors. The total risk is evaluated as the sum of the
systematic and the unsystematic factors.
Systematic risk involve the unforeseen or uncertain events that is faced by the company in its
everyday life and which are uncontrollable. Some systematic risk are market risk, interest rate risk,
inflation risk etc.
Market risk- The public company may face constant fluctuations in the market by the
occurring the changes in the share price or the securities of the electronic companies.
Interest rate risk- This risk arises because of the variability in rate of interest. It specifically
affects the debt securities as it carries the fixed interest rate (DuHadway, Carnovale & Kannan,
2018). At the time of making investment in the electronic company, public company can face this
risk on account of the debt securities issued by the company.
Inflation risk- It depicts the risk involved during the inflationary period. It will not be

desirable for the public company to invest in the securities of the electronic company at the time of
inflation because the prices are high and it highly affects the purchasing power.
Unsystematic risk includes the business and the credit risk, which could be diversified by the
company by taking the corrective actions on time.
Business risk- It refers to the risk that will be affecting the sale and the purchase of the
securities by the public company due to the technological advancements and the business cycles.
Credit risk- It arises because of the changes in capital structure of company (Lee, Hooy &
Brooks, 2018). This will affect the public company in relation to the changes in the owner's fund,
retained earnings and the borrowed funds of the electronic company.
Defining strategies for risk diversification in case of public consumer electronics company.
Risk is defined as probability of incurring losses related to business or investment. It simply
means deviation from the expected results or returns. Every business organisation as well as
individual has to take some preventive measures for mitigating risk associated. Risk management is
considered as one of the most important factor for overcoming the adverse impact of risk. It should
be properly managed with the help of formulation of sound and better business plans and strategies.
For minimizing risk associated, the best method is to made diversification of funds in
different - different sectors, asset class and good rated company. The main aim behind risk
diversification is to maximise returns by investing in different financial areas, financial instruments
etc. Different strategies for diversifying risk factors are as follows:
1. By making diversification in portfolio in different investment options as available in the
financial market. Several types of investment vehicles includes cash, property, stocks,
mutual funds, exchange traded funds, bonds and any other types of funds. It is the duty of
fund managers as well as investor to carefully observe the market and then make
diversification in portfolio so that any risk associated can be eliminated further to an extent
(Schmitt and et.al., 2015). Fund manager, investor, portfolio manager can diversify their risk
related with investment by diversification. Properly diversifying available fund amount, cash
or money among different assets classes can help in minimizing risk to a great extent in
comparison of allocating of funds to a single basket.
2. Diversification can be made within different types of sectors, industry, market capitalisation
and region. Investment in securities can be made in different sectors, industries which are
prevailing in the financial as well as capital market. Investor should always ensure that a
good mix of securities has been selected for the purpose of risk diversification. Proper and
effective mix of securities of different sector companies, industries should be made by
keeping in mind the investment objective of the investor. As per return expected or defined

objectives of investor, the fund manager or portfolio manager should consider the main goal
behind making investment and diversification. One should define the objective behind
making investment i.e. growth oriented, income oriented or value defined. On the basis of
motive of making investment, diversification has to be made in varying sectors and
industries accordingly.
3. While framing investment strategies and plans, objective behind such investment has to be
clear in the mind of both the investor as well as fund manager. Investing only in the blue
chip companies is not always considered as a good option but for investment purpose
selection of different companies which is performing better in the current market will also
be fruitful (Buchner, Mohamed and Schwienbacher, 2017). Investment with different rate of
return and time horizon always ensures that losses incurred in stock market can be cover up
by making large gains by making portfolio diversification. Diversification should be made
among different company having varying size, of different sectors and geographical range.
CONCLUSION
From the report it has been concluded that financial-management is concerned with the
management of funds, money resources. The term financial management is related with proper and
effective management of available business and financial resources for smooth functioning of
business operations. With the help of management of financial resources, company can make
allocation its funds in different sectors, asset classes and industries. By making portfolio
diversification, risk can be eliminated to a great extent. Risk diversification can help investor in
maximising return from investment options. The report has also discussed that several factors such
as profit rate, past dividend policy etc. should be considered for framing of current year dividend-
policy.

REFERENCES
Books and Journals
Aven, T., 2016. Risk assessment and risk management: Review of recent advances on their
foundation. European Journal of Operational Research. 253(1). 1-13.
Belo, F., Collin ‐ Dufresne, P. and Goldstein, R. S., 2015. Dividend dynamics and the term structure
of dividend strips. The Journal of Finance. 70(3). pp.1115-1160.
Brick, I. E. and et.al., 2016. A comparison of alternative models for estimating firm’s growth
rate. Review of Quantitative Finance and Accounting. 47(2). pp.369-393.
Bromiley, P. and et.al., 2015. Enterprise risk management: Review, critique, and research
directions. Long range planning. 48(4). 265-276.
Buchner, A., Mohamed, A. and Schwienbacher, A., 2017. Diversification, risk, and returns in
venture capital. Journal of Business Venturing. 32(5). pp.519-535.
DuHadway, S., Carnovale, S., and Kannan, V. R., 2018. Organizational Communication and
Individual Behavior: Implications for Supply Chain Risk Management. Journal of Supply
Chain Management. 54(4). 3-19.
Ho, W. and et.al., 2015. Supply chain risk management: a literature review. International Journal of
Production Research. 53(16). 5031-5069.
Jagannathan, R. and Liu, B., 2019. Dividend dynamics, learning, and expected stock index
returns. The Journal of Finance. 74(1). pp.401-448.
Lee, M. H., Hooy, C. W., and Brooks, R., 2018. Decomposition of systematic and total risk
variations in emerging markets. International Finance. 21(2). 158-174.
Paquin, J. P., Tessier, D. and Gauthier, C., 2015. The effectiveness of portfolio risk diversification:
an additive approach by project replication. Project Management Journal. 46(5). pp.94-110.
Schmitt, A. J. and et.al., 2015. Centralization versus decentralization: Risk pooling, risk
diversification, and supply chain disruptions. Omega. 52. pp.201-212.
Vizcaíno-González, M., Iglesias-Antelo, S., and Romero-Castro, N., 2019. Assessing
Sustainability-Related Systematic Reputational Risk through Voting Results in Corporate
Meetings: A Cross-Industry Analysis. Sustainability. 11(5). 1287
Online
Strategies for Risk diversification. 2019. [Online]. Available through:
<https://www.macquarie.com/au/personal/investments/expertise/investment-diversification-
strategy>.

Factors affecting dividend policy. 2019. [Online]. Available through:
<http://www.businessmanagementideas.com/financial-management/dividend-policy/factors-
affecting-dividend-policy/18909>.