Corporate Financial Management Part A and Part B

Corporate Financial
Management Part A
and Part B

Table of Contents
INTRODUCTION ..........................................................................................................................3
PART A...........................................................................................................................................3
PART B............................................................................................................................................3
Task 1: Reason behind diversification leading to reduction in risk in relation to return.......3
Task 2: Calculate the following and justify the value of Sporty PLC....................................5
Task 3: Calculate NPV...........................................................................................................9
Calculate Standard Deviation...............................................................................................10
Make the curve showing the probability of the NPV which is less than zero, assuming a
normal distribution of return................................................................................................10
Critically evaluate how the traditional NPV is as effective as NPV methods with real option
perspectives and incorporating probabilities........................................................................11
CONCLUSION .............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Corporate finance deals with the arrangement of funds, capital formation and its
management in order to increase the reputation and value of firm among the stakeholders and
market. It focuses on maximising the price of shares by making different long and short term
plans. The concept helps the owners of the business to take various investment related decisions
so that they can grab best opportunities prevailing in the market (Agyei-Mensah, 2018). The
company chosen in this report is Rebecca and Roy Race (RR) Ltd. It is a fashion company
dealing in seasonal brands and providing different products for middle income women and
younger ones. The report is divided into two parts. The first sections deals in pros and cons of
incorporating debt in existing portfolio of equity and debt. The second part discusses about the
reduction of risk by diversifying investment through pension scheme. It further calculates the
value of company for taking investment decision. It also determines the present values of money
invested in a proposal and whether it is beneficial or not.
PART A
This part is included in Power point presentation.
PART B
Task 1: Reason behind diversification leading to reduction in risk in relation to return.
Diversification is tool of managing risks by distributing the investment among various
businesses, investment opportunities or industries. The main aim behind choosing this format is
to maximising the return from various sources so that failure in one scheme would not result in
loss from complete investment. Their is a well known phrase that never put all your eggs in one
basket only. Looking from the financial point of view, own should opt for multiple opportunities
rather than contributing in single plan only. For example, a person can invest its cash in stock as
well as debentures. When there is any sort of depression in the economy, the value of debentures
will be secured even when the prices of shares have been reduced. In this way, even when its
profits are not increasing, the risk of investment could be reduced (Brigham and Houston, 2021).
Whenever a person invests in any financial instrument, it brings risks along with returns
which must be taken into account while taking any investing decision. Risk can be defined as a
rate of chance with which the actual results can differ from the expected ones. Their are
generally two types of risk whose management depends on the calibre of the investor. Systematic

risks are uncontrollable and holds the power to show effect on macro level. It can impact the
whole investment plan or the complete asset. Some common examples under this can be
inflation, interest rate or any law or policy passed by government related to investments. These
all can have major affect on the asset value. On the other hand, unsystematic risk are very small
and effects only at small level. It can be some specific industry or part of asset. For instance, fire
in factory can slightly make impact on the shares prices of that firm (Dalal and Thaker, 2019) .
These risks can be evaluated by applying various methods, out of this the two methods
which can be used in case of investing in assets are as follows:
 Covariance is a technique that helps in valuing two assets in relation to one another. It
helps in reducing the chances of volatility by providing scope of diversification. Negative
result in its analysis shows that the two investing opportunities are following an opposite
trend. While the positive interprets that both of them are following the same path. This
positive result is very important for reducing the risk of investment. Normally, historical
price is used in it for ascertaining whether a particular scheme should be included in
portfolio or not. But there is some limitation which makes the use of tool slightly
ineffective. It do not calculate the strength of the relation among the prices of different
assets. But still this method is very much popular among the analysts for constructing
their portfolio (Giosi and Caiffa, 2020).
 Capital Asset Pricing Model interprets the relation among the risks and returns which is
expected by the investor. Under this method, the investor tries to compensate its risk
along with the impact of time value of money on the scheme. It simply shows that
anticipated profits on security is same as the risk premium in addition to risk free return.
The objective of using this tool is for ascertaining the prices of securities and generating
information that whether the assets can bring expected returns in prevailing risk and cost
of capital.
Investors invest their money in order to yield some profits out of it. For this, it is
important for them to check how much return a particular investment can bring and the extent of
risk associated with it. The above mentioned methods can be used for solving this purpose.
Points to be kept in mind at the time of diversification: