Corporate Financial Management: Risk Mitigation and Investment Assessment Approaches

PGBM 142 Corporate
financial management

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
PART B...........................................................................................................................................3
Task 1...........................................................................................................................................3
Task 2...........................................................................................................................................3
Task 3...........................................................................................................................................6
CONCLUSION................................................................................................................................1
REFERENCES................................................................................................................................2

INTRODUCTION
Every stakeholder strives to maximise profits whilst minimising risk. Every function
includes a threat which is compensated by a return (Alziyadat and Ahmed, 2019). The bigger the
risk, the higher the gain, as the saying goes. As a consequence, in attempt to maximise earnings,
a purchaser should accept more threats. Broadening your portfolio among many items with
different rewards and disadvantages is another way to reduce unpredictability. The first half of
this study examines how a business person could manage threat and profitability. Several
techniques to evaluating a company are discussed in the following report. For a better
understanding, the study's concluding portion illustrates investment assessment approaches.
PART B
Task 1
Diversification is a risk-mitigation strategy wherein a fund's or commodity's interests are
varied. Pension scheme diversification refers to participating in multi-asset approaches that give
members with elevated risk-adjusted returns. Private pensions participate in different securities
to stabilize the market and increase predicted returns. The objective of this essay is to show how
variety decreases risk whilst raising future earnings. The goal of diversification in private
pensions is to reduce risks such as economic and funding choices. Variability in the business
occurs as a consequence of factor influencing an entire market sector, such as borrowing costs
and currencies prices (Aureli, Magnaghi and Salvatori, 2019). Investment instability occurs when
such an individual firm's earnings miss the mark. In various pension plans, risks are spread
among a variety of product kinds. Moreover, a diversification plan decreases the downside risk
which might occur when pension money is engaged in a particular type of endeavour. Coefficient
values may aid in increasing investment variety. Connectivity is utilised in investing
management to look at a situation comprised of stocks in the plan. A statistically significant
correlation means that assets are travelling in the same direction, whilst a weak relationship
means that assets are going the opposite way. As an outcome, low-correlation assets are put
together to create diversification. The unpredictability of the content of information of assets is
reduced as capital is invested in multiple directions.
Members in the CAPM model have a wide range of financial classifications, which helps
to reduce overall instability. As a consequence, rather than a general hazard, the relevant risk is a
repeating concern. As a reason, employees that undertake deliberate chances rather than
opportunity cost might expect higher profits.
Task 2
Sporty PLC is being acquired by the management of RR Ltd. Sporty PLC, on either side,
has failed amid the establishment of a men's apparel business. As per CEOs polled, the reduction

is attributable to an inability to predict current tastes and tendencies. Before proceeding with the
acquisition, RR Ltd should initially determine the value of Sporty Ltd (Chaston, 2017). As a
consequence, the purpose of this task is to determine Sporty Ltd's value utilizing the P/E ratio,
payout evaluation technique, and DCF research, as detailed below-
P/E ratio-
The price/earnings ratio is calculated by dividing the fair value of the present component
value of units by the company's income each piece. Using the P/E ratio, one could establish if
RR Ltd overvalued or undervalued the sporty PLC shares. The EPS of Sporty PLC is calculated
by splitting net profit after taxation by the number of units authorized.
EPS = net profit/number of shares outstanding Net profit = £4200000
Weighted average dividend = 9 / 100 * Sale (£ 20 m)
= 9 / 100 * £ 20 m
=0.09 * $ 20000000
= $ 1800000
Number of shares £1 = I shares
£40000000 = ? shares (£40000000 * 1 share )/£1
= £40000000 / £1
= 40000000 shares
EPS = 4200000 / 40000000 =0.105
This implies that one item of sporty is equivalent £0.105 in stock, showing that the
market value of a corporation is conservatively calculated. As a consequence, the firm would
profit £0.105 each piece from its current inventory (Chen, Tan and Fang, 2018). The price-to-
earnings ratio would've been 9.523 (1/£0.105).
Dividend Valuation Approach-
It is used to estimate the industry's value as the present value of all expected future
dividends payments. As shown below, the stock value is calculated by multiplied the payouts
each piece by the required bond yields less the payout productivity increase.
Stock value = dividend per share / ( required rate of return – dividend growth rate )
= 9 / ( 17 % - 9 % )
= 9 / ( 8 % )
= 9 / ( 0.08 )
= £112.5 m
To calculate the percentages of interest, divide the dividends distribution by the shares
valuation and multiplied by the annual productivity increase. The stock price is calculated by
multiplied the stock payment amount by the total revenue.
Rate of return = (dividend payment/stock price) + dividend growth rate
Stock price = £6 ( 9 % -7 % )