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Corporate Finance and Modern Portfolio Theory - Report

   

Added on  2020-01-28

16 Pages5106 Words46 Views
CORPORATE FINANCE

INTRODUCTIONIn the financial sector there are corporate finance having an integral place which helps toa business organisation in order to take investing decisions in the highly appropriate manner. Byconsidering the corporate finance aspect management of an entity able to deal with the financingsources and make the capital structure in the proper way. If it not considers the capital structureand corporate finance then not able to raise fund by making profitable proportion like as debt aswell as equity financing. The current study is about the FTSE 100 which is an index of theLondon Stock Exchange market and diversified in several kinds of segments. On the basis of thepresent report the reader able to understand and analyse that when the current index add the newand additional assets in its existing portfolio then it will not generate the benefits in term ofdiversification. The reason and causes behind not affecting new assets to the FTSE 100 is to beprovided along with the empirical evidence in through the respective report. The current reportof the corporate finance shows and focuses on the modern portfolio theory which relies with themain two aspects of the investment and portfolio which are like as risk and return. There arethree kinds of empirical evidences are to be discussed of the FTSE 100 statement at here whichare like as opportunity cost, index fund and volatility of the stock market.MAIN BODY OF ESSAYAt the every kind of business entities there are corporate finance having a key part inorder to assess the appropriate funding sources and make the investment as well. With the helpof this respective method the management able to make the portfolio for putting money invarious aspects and avenues of the investment which are available in the market. In the portfoliodifferent investment avenues are considered which are like as equity shares, preference shares,debentures, real estate, commodity, precious items, gold, silver etc. In the corporate financemainly four kinds of steps are followed and adopted by the company for making investment it(Vernimmen and et.al., 2014). Further, the stages and phases are like as planning, raising thefinance, investing as well as monitoring that whether it providing return in the positive ways ornot. In the stock market there are different indexes available where the investors put money andgenerate return or loss as per the market condition. In the current case study there is FTSE 100indices is to be analysed which is one of the highly traded in the London Stock Exchange market.The current kind of the index is diversified in several types of the companies which are operatingin the different number of sector such as oil and gas, energy, retail, telecommunication, banking,1

service, consultancy, food processing, manufacturing, infrastructure etc. At this point it has beensaid that if the FTSE 100 add one more kind of asset and company in the existing portfolio thenit will not gain any kind of benefits and advantages because of already diversified in he severalsectors.In the market index of the FTSE 100 there are huge number of the companies are listedwhich issue their shares in the market with the help of stock exchange market. There are severalkinds of shares like as equity, preferred, preference, debentures etc. issued by the companiesusing two processes such as initial public offering and follow on public offering which aredifferent up to some extent (Kumar and Mishra, 2016). Among these both the processes there is asimilarity that these help to the business entity in order to issue equity shares in the market. Thecompany when gone through the listing process in stock market then issue equity shares at thefirst time that will consider as initial public offer. On the other side when a company issue itsshares and stock in the market for raising fund at the second or more time, then the process isknown as follow up public offer. Motive of adopting both the processes at the workplace is toraise fund and enhance capital in the company for business expansion, purchase new plant andmachinery or any other business purposes. This is one of the key and important part of thecorporate finance and implied using the different indices of the stock market like as FTSE 100.By using the diversification strategy the investor able to reduce overall risks of the investmentwhich they made in different kinds of avenues. Along with this level of the profit and amount interms of the return also generates up to the higher level. When comparing and analysing both theaspects of the investment such as risk and return then it can be said that higher the risk taken bythe investor able to generate more return (Jorda, Schularick and Taylor, 2016).What is Diversification:In Finance diversification is the process of allocation capital in a way that reduce theexposure to any any one particular assets or risk. A common path or way towards diversificationis to reduce risk or volatile by investing in varieties of assets. If assets price do note change inperfect synchrony a diversified portfolio will have less variance then weighted average. Varianceof its constituent assets, and often less volatile then least volatile.It is risk management technique that mixes a wide variety of investment within a portfolio.rational behind the technique contends that portfolio constructed of different kinds of investment,2

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