Corporate Finance Assignment Example

Corporate Finance
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Abstract
The tertiary industry is like nervous in our body. The economy cannot move without it. The
tertiary industry is a very large industry. It gives employment to many employees. Here in this
study, we are going to discuss the benefits retirement plan is more beneficial for the employees
of tertiary industry. All the aspects of the plans will be discussed as to give a complete
knowledge to the employees and make easy for them in choosing the best plans.
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Contents
Abstract............................................................................................................................................2
Introduction......................................................................................................................................4
Investment choice plan....................................................................................................................6
Understand the fund.................................................................................................................6
Comparing the funds................................................................................................................7
Define benefit plan..........................................................................................................................7
Calculation of define benefit plan................................................................................................7
Unfunded benefit plan..................................................................................................................8
Decision making facts..................................................................................................................8
Comparison between define benefit plan and investment choice plan..........................................10
Hypothesis..................................................................................................................................11
Efficient Market.........................................................................................................................11
References......................................................................................................................................12
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Introduction
There are three types of sectors prevailing in the economy the primary sector - raw materials,
secondary sector- manufacturing, and the third sector - tertiary sectors. With the time the
proportion of employees to work in tertiary sector is increasing. In this assignment, the
discussion is related to retirement schemes or retirement plans has been made. This discussion
has been made for the benefit of an employee looking for better retirement plans i.e. after
comparing various retirement plans. In this report, some important factors have been discussed
for the tertiary sector employees for the selection of better plan superannuation plan. Comparison
of a defined benefit plan and investment choice plan has been considered. There are some issues
or some considerations related to the decision-making process that should be considered while
selecting the best plan.
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Diagram - the diagram shows the cycle of the tertiary sector.
The diagram shows the cycle of the tertiary sector. The raw materials are extracted from the
resources. These raw materials are extracted by the employees giving service to the companies to
help them in the extraction of the raw material. The second phase of forwarding it to the
manufacturer for further process. The products are sending to the market of the utilization. All
these processes are carried by the service sector to provide services to the different industries.
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These tertiary sectors are very important for the moving of the services. If at any point they are a
lack of the services than the chain breaks and the further process is hindered.
The employees working in the tertiary sector have all the rights to choose and to invest their
superannuation as per there wish. The employees cannot invest the superannuation as per his
wish. The superannuation or the retirement fund or the pension fund is the last remuneration
received by the employees from their company as full and final. Employees have two options to
select the plan to invest their superannuation for retirement. The defined benefit plan and the
investment choice plan. The detail benefits and the drawback of the process to invest is explained
an asunder.
Investment choice plan
Retirement planning is to plan and determine the income and what lifestyle one wants to live and
to put into action the planning done to achieve the goals. As early the employees start saving for
their future and make an investment in the mutual funds, stocks, and employer-sponsored plans
or any other way of investment for long period the more the money will grow. The investment
choice plan is the market-based plan. In which the employees invest their money in the shares,
mutual funds, and other market-related plans. The returns are very good and no fixed amount to
can define at the initial stage. An estimate of profits can be made and with the past performance
of the fund.
Which fund to choose is a very important decision as it will hold all the income of the employees
and the future plans? The employees have options such as balanced fund, growth funds, and
conservative funds. In this study, we have discussed in detail the steps to be followed to
determine before finalizing any fund.
Understand the fund
To invest in any fund the employees should first understand the fund. The performance of the
fund in the past years should be studied. In what market position the funds are in profit and when
the market sinks. These studies give a data of time to invest in a particular fund.
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Comparing the funds
The employees should compare the funds and do a deep study of the plans should be done. In
how much time the funds will give returns? What is the rate of growth? All these facts should be
compared to get the best fund as per employee’s requirement.
Define benefit plan
The most common and easy word introduction of a defined benefit plan is final salary. This
scheme provides the employees with a particular leave of benefit related to years they have
worked and how much salary they drew in their service years in one company. To calculate the
defined benefit plan is linked to the employee's income/ and the no of years he has given his
services. The employer also contributes to the ratio of employee’s services time and income. The
managers who regulate the define benefit plan make it confirm that both the parties the
employees and the employer have made their contributions. The defined benefit plan is safe as it
is not a market linked plan. The need for the employees at the time of retirement is the base that
the employees decide at the initial time of the plan. This desires amount is then calculated as per
the current income and the no of the year left in retirement. The amount which will be received
at the time of retirement is pre-decided. The premium or contribution is done according to that.
The defined benefit plan also includes a pension for the employees. The number of years the
employees will get the pension is also fixed. Another variable is that it represents the amount
which is received at the time of retirement. When the scheme will end that time also the
employees will get some amount other than the fixed amount this part is Accrual rate.
Calculation of defined benefit plan
Number of years employees worked in a company * salary of the employee at the time of
retirement * accrual rate
The formula to calculate the defined benefit plan is fix. This includes the number of years
worked by the employees in the tertiary sector, his salary and the accrual rate of interest. Some
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other benefits are also received by the employees by defined benefit plan like the get various tax
benefits, a big amount is received at the maturity.
Unfunded benefit plan
Define benefit plan has two options funded and unfunded benefit plans. The unfunded benefit
plan does not include the investment done in the assets. The funded benefit plans are funds
which consider the investment in the assets. The funded benefit plans are safe as they have a
support of the assets based companies whereas the unfunded plans lack this backing. One lacking
is observed in funded benefit plan is that it sine is not paid to the employees at the retirement or
maturity of the plans as this amount is considered as Uncalculated at the beginning of the
calculation of the maturity amount.
Decision making facts
The market situation called inflation is very harmful as it increases the living cost and the
allowance also. Investments made for short period incurred great losses. The graphics description
shows a dip at a great volume. Such market situation is not affected in the long term. The
investment in defined benefit plan is done for the long term, as a rest of which the effect of
inflation is not seen in these plans. The defined benefit plan is not market linked; whatever be the
market conditions these plans are safe. The investment of these plans is done in secure funds,
which have great support. Define benefit plans are therefore safe to invest. The fluctuation in the
market does not affect the amount invested and amount of maturity.
The amount to be received on maturity or retirement is decided by the employees as per there
future requirements. If a higher amount is desired by an employee in future then they need to
save more in current time in terms of the benefit plan.
Time is the most important factor to decide the fund. The growth of the money depends on the
time for how much funds are invested. These funds have a life cycle to perform. Some are for
short-term and some are for long term. The short-term funds give benefits in short terms while
the long term funds need time much more time to perform.
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Taxes are another important factor that should be considered by the territory sector employee
while selecting best superannuation or retirement plan. Taxes are compulsory to be paid over the
income generated by the employee on any investment. In case of investment choice plan, tax
expense for the employee will be higher ass compared to the defined benefit plan. On the other
hand, if the defined benefit plan is matured before the set period of time i.e. lock-in period then
there will be tax expense on the same. Therefore tertiary sector employee needs to consider tax
expense issue while selecting superannuation plan.
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Comparison between define benefit plan and investment choice plan
Heads Define benefit plan Investment choice plan
Aim To provide employees with the
benefit of pension for a lifetime.
To give assistance to the employees to
gather funds for their retirement funds in
the current.
Contributions Employees give contributions to
invest in the pension fund which
will pay him a lifetime pension.
The money is contributed both by the
employees and the employer in the set
ratio.
Income at
retirement
As the employees retire and the
pension starts it will continue
lifelong.
The time as for how long the pension will
be paid depends on facts like the total
amount of investment returns and the rate
of interests. Lifelong payments are not
guaranteed.
Other benefits Additional benefits are received as
a Tax benefit. Inflation benefit,
early retirement benefits, survivor
benefits, disabled benefits
The extra amount is received if the market
is in a positive position all the time of
investment. This benefit is also confirmed
if the market performance is negative
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Hypothesis
Efficient Market
The efficient market is the market which processes the information efficiently. A quick and
correct adjustment of new information is done in the effective market. The information related to
prices of any fund is correctly evaluation of all the information available in present time. That’s
the reasons in the efficient market provided information is full a reflection of the available data.
A market in which the market price of the securities is unbiased estimates of the intrinsic value
of the securities- Wilfred O’Brien.
In the Efficient Market, the pension fund manager does not play an important role. As all the
decision is made on the current situations of the company, as a result, the decision can be made
by the individuals themselves. In this situation, there is no need for the pension fund
manager. The role of the pension fund manager is hampered in the efficient market. The
employees do not need the old data and records they do not compare or study the past
performance of the fund in the market. Which time of the market is good for investment or which
sector benefit only studied? The data with the pension fund manager are not used as the current
prices are used for the investment. In such market, the individuals are in a situation to invest and
take a decision regarding the funds. No file of old records are required and no study is to be
made for the investment by the pension fund manager, he need not update himself and take pains
to collect the current information for various funds. The fund's manager just has to perform the
duties to fill the form and put the amount as per the wish of the customer.
In reality, no such market prevails, no funds are invested just on the current prices. A complete
study is done and the comparison is done between various funds of for different time and tenure.
Every individual needs the help of the pension fund manager to manager and gives relevant
information to the customers. This hypothesis of an efficient market is not practical and does not
prevail in the real market. No funds are invested in only there price bases.
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References
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