This document discusses various topics related to corporate finance, including investment returns, impact of Euro formation on arbitrage opportunities, shareholder dividend preferences, and stock price changes.
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Running head: FUNDAMENTALS OF CORPORATE FINANCE Fundamentals of Corporate Finance Name of the Student: Name of the University: Authors Note:
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FUNDAMENTALS OF CORPORATE FINANCE 1 Table of Contents 1. Indicating the amount left in 1933, while stating the amount at the end of the year and detecting the whether 143% should be included in the return series:........................................2 2. Discussing the impact of the formation of Euro on the potential arbitrage opportunities:....3 3. Indicating why shareholder shouldn’t prefer residual dividend policy:.................................3 4. Identifying what happened to the price of the firm’s stock as a result of these activities:....4 References and Bibliography:....................................................................................................6
FUNDAMENTALS OF CORPORATE FINANCE 2 1. Indicating the amount left in 1933, while stating the amount at the end of the year and detecting the whether 143% should be included in the return series: Yea rInvestment ValueLoss in return 19295,000.0050% 19303,000.0040% 19311,500.0050% 19321,425.005% 19333,462.75143% The above table provides information regarding the investment of $10,000, which was being conducted at the start of 1929, where the overall investment values remained at the end of the period to $5,000. This was due to the losses incurred during the financial year in the stock market. In the similar process the overall investment value of $10,000 continued to decline during the depression. However, during 1933 the return of the stock market was exponential and provided a total return of 143%, which did not allow the investor to compensate for the losses incurred during the past 4 years during the recession. Farmer (2015) mentioned that investors conducting relevant investments needs adequate strategies, as during the recession the stock market tend to be volatile, which hampers the capital investments. The initial investment conducted by the investors before the recession was crumbled down to $1,425 at the end of 4 years. Hence, it could be identified that the high returns on a single year cannot compensate for the losses on the initial capital, which was incurred by the investors in their investments. Thus, it is assumed that investments need to be conducted with adequate risk assessment, which can minimise the risk involved in investments.
FUNDAMENTALS OF CORPORATE FINANCE 3 2.DiscussingtheimpactoftheformationofEuroonthepotentialarbitrage opportunities: The formation of Euro dealt the highest level of impact on arbitrage opportunity that was present within the Eurozone. The reduction in number of currencies that was present within the Euro zone has greatly diminished the possibility of arbitrage opportunity that was present within the currency trade. Arbitrage opportunity is mainly created after getting relevant discrepancy in the currency valuation of different counties. The nonexistence of Euro was mainly helpful for invest conducting the arbitrage opportunity, which provided them with investment options that has low risk and adequate returns from currency market. Ferri and Pesic (2017) mentioned that investors use arbitrage opportunity by finding the loopholes in currency valuation, which in turn help in generating riskless gains from investment. The use of Euro has mainly reduced the possibility of the any kind of arbitrage opportunity that was previously present within the Euro countries, as they had individual currencies, which was traded in the currency exchange. However, after the incorporation of the Euro the member countries used Euro, as their base currency for conducting all the relevant trades within and outside the country. This made currency of member countries of Euro zone dormant and their valuation was deregulated from the currency market. GBP and some minor currencies were the only currencies that is still been in use after the creation of Euro. The presence of Euro as the internationally traded currency has reduced the occurrence of arbitrage opportunity, which was previously present to the investors. 3. Indicating why shareholder shouldn’t prefer residual dividend policy: The assumption highlights that dividend decisions directly affects the investment decisions of the organisation. The use of NPV analysis allows the management to determine
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FUNDAMENTALS OF CORPORATE FINANCE 4 the accurate level of investment option, which can improve financial capability of an organisation. However, fulfilling the NPV project without using the funds of shareholders will require the organisation to increase their exposure in debt, which in turn reduce the possible dividends that could be generated by the investors. Baker and Jabbouri (2016) mentioned that shareholders dislike the unstable dividends that is provided by companies, as it reduces the possibility of generating high level of income from operations. The residual dividend policy is not in the best interest of the shareholders, as the adoption of the method will increase fluctuations in the current dividend pay-out. The residual dividend policy has major disadvantage, as it increases the risk of expected dividends that the demanded by the investors. This adoption of residual dividend policy will allow the organisation to take all the project with positive NPV, which will substantially reduce the dividend pay-out that is presented to the investors. Hence, the addition of residual policy is not beneficial for the investors. the investors intend to get constant dividends from the organisation, where any decline in the current operations will have direct impact on the returns of the investors. Henceforth, the organisation needs to select dividend policy that pays-out adequate dividends to the shareholders regardless of the number of projects that is selected to increase shareholder’s wealth (Baker and Weigand 2015). 4. Identifying what happened to the price of the firm’s stock as a result of these activities: The investors stock in SplitsVille Corp changes with each action taken by the organisation during the period. This decision made by the company relevantly increases and decreases with the number of shares held in the company. The first split of 2-for-1 will increase the number of shares from 100 to 200. In the second instance, the 100% stock dividend is provided to the investors, which again raises the shares by 2-for-1, which
FUNDAMENTALS OF CORPORATE FINANCE 5 increased the number of shares from 200 to 400. Furthermore, the announcement of 1-for-4 reverse split again made the position of the investor from 400 shares to 100 shares. Hence, it could be identified that the current position in the company will relevantly remain same after the decisions that was panned out by the management. Demir and Rigoni (2017) mentioned that the management uses adequate measures for increase in the demand for the shares, which in turn help them to improve their market valuation. The similar instance is detected for the share price of SplitsVille Corp, which relevantly increased and declined due to the actions taken by the management. Therefore, the absence of any market imperfections will directly result in a positive behaviour from the actions taken by the management. The stock will fall by one-half and then again it will fall by one-half and quadruple back to the original share price.
FUNDAMENTALS OF CORPORATE FINANCE 6 References and Bibliography: Baker,H.K.andJabbouri,I.,2016.HowMoroccanmanagersviewdividend policy.Managerial Finance,42(3), pp.270-288. Baker, H.K. and Jabbouri, I., 2017. How Moroccan institutional investors view dividend policy.Managerial Finance,43(12), pp.1332-1347. Baker,H.K.andWeigand,R.,2015.Corporatedividendpolicyrevisited.Managerial Finance,41(2), pp.126-144. Chan, K., Li, F., Lin, J.C. and Lin, T.C., 2017. What do stock price levels tell us about the firms?.Journal of Corporate Finance,46, pp.34-50. Demir, E. and Rigoni, U., 2017. You lose, I feel better: Rivalry between soccer teams and the impact of schadenfreude on stock market.Journal of Sports Economics,18(1), pp.58-76. Farmer, R.E., 2015. The stock market crash really did cause the great recession.Oxford Bulletin of Economics and Statistics,77(5), pp.617-633. Ferri,G.andPesic,V.,2017.Bankregulatoryarbitrageviariskweightedassets dispersion.Journal of Financial Stability,33, pp.331-345. Rabbani, A.G., Grable, J.E., Heo, W., Nobre, L. and Kuzniak, S., 2017. Stock market volatility and changes in financial risk tolerance during the great recession.Journal of Financial Counseling and Planning,28(1), pp.140-154.