Corporate Financial Management: Investment and Valuation Analysis
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This study material covers investment and valuation analysis in Corporate Financial Management. It includes analysis of diversification, valuation methods, and NPV calculation for expanding business in Asian-Pacific markets. The material is relevant for PGBM142 course.
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Corporate Financial Management
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TABLE OF CONTENTS PART A...........................................................................................................................................3 PART B............................................................................................................................................3 Task 1..........................................................................................................................................3 Task 2..........................................................................................................................................5 Task 3..........................................................................................................................................9 REFERENCES..............................................................................................................................14
PART A Incorporated in PPT PART B Task 1 In the present case of RR ltd, the company is establishing the private pension scheme for the employees. The pension scheme is being defined as the long- term saving plan and is a tax efficient way for saving the money during the tenure of working life. Here, the employee saves a small portion of their salary into a separate account for the future (Belderbos, Tong and Wu, 2020). This is a good scheme that the company is using as this will motivate the people to work in the company as they are getting the benefit of the pension. This is essential because it will be providing a base for the saving of some of the amount for the future use. Yes, it is true that diversification leads to reduction in the risk and relative return. This is necessary because of the reason that when the person invest the amount of money in diversified portfolio then it results in less risk and more returns. This is necessary because of the reason that when the company will be investing the total amount in a portfolio including different types of investment option then it will increase return and reduce the risk. It is because when the investment by the person is done in different options then in case if one option is not providing return then other will provide. As a result of this, the working and return will be good for the person. It is beneficial for the company or the person to invest the money in variety of investment option. This is generally because of the reason that when the small investment is done in list of different investment option then this provides more return. For instance, within the portfolio there are 6 different investment options and the total amount of investment is being divided in all these options equally. In case two out of all the investment option is not providing good return then it will not affect the overall return (Guesmi and et.al., 2019). The reason behind this fact is that when the two investment option are not performing good but the other four investment options are providing good return. Therefore, this will recover the return of the other two investment options as well. Now assume the situation in which all the investment money is being invested in a single option only. Now in the present situation, in case the investment option will be in loss then this will be reducing the total return of the person’s investment amount. Here all the money invested
will provide loss and the person will not be getting any return. Thus, as a result of this all the money will not be yielding return and rather the risk will be increased. Hence, with the above depicted both the situations it is clear that the diversification at the time of the investment need to be present (Liu, 2019). The reason underlying this fact is that when the investment option is being diversified then this will lead to benefits to the person or the company doing the investment. The investment option will be only good in case the risk and return trade- off relating to the investment option is good. This is necessary due to the fact that when the investment option will be analysed and evaluated in proper and effective manner then this will be result in good return. Thus, before selecting any of the investment option it is being evaluated on the basis of the risk and return which the option is providing. In case the risk of the investment option is more than the investment will not be done. On the other hand, in case the return from the investment option is more than the investment will be undertaken (Antonakakis and et.al., 2018). Thus, a balance between risk and return should be there and whichever will be less will be selected for investment. This is particularly when the balance is present between the risk and return then this will be providing good return. Therefore, the decision relating to where to invest always depends over the risk and return being provided by the investment option. In the present case of RR Ltd the private pension scheme is provided for employees and this is beneficial for the employees. Because when the company is providing this facility then some of the money of employees will be saved. In addition to this, the employees can invest other part of their salary in other investment options. Also, if the covariance of their both the investment will be negative then it will be good sign for employees. Because if there is increase in return of one investment than their will be decrease return of other investment. Therefore, the establishment of private pension scheme by the company for its employees is good as this will be providing much better return and also the risk will be diversified. As a result of this the working and return will be more good and effective. With the above analysis it can be evaluated that the use of proper investment option in the proper working of the company. This is particularly necessary because of the reason that when the effective analysis of investment option will not be done then this will be affecting the work to a great extent (Akhtaruzzaman, Sensoy and Corbet, 2020). So, it is very important for the business to work in proper and effective manner. The reason pertaining to the fact that when the
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working of the company is not good and effective then this will be impacting the earning and return to a great extent. When the performance of the portfolio will be managed in proper manner then this will be impacting the income of the company in good and effective manner. As, as a result of this, the income of the person will be increased to a great extent. Task 2 Question 1 a) Price earnings ratio: Earnings per share: 4.2/40 = .105 4/ .105 = 38.09 Value of share: ◦* .105 = 4.0845 Market value of Sporty Plc: 4.0845 * 40 = 163.38 B) Dividend valuation method: Current dividend9 Growth rate4% Risk free rate5% Beta1.15 Number of share40
Return on market12% Value of firm:Rf +(Rm-Rf) Beta 13.05% Market value per share2 * (1 + 4)/ (13.05 – 4) = 1.105 Market value of sporty plc44.2 (40 * 1.105) Discounted cash flow method Net income4.2 Free cash flow4.2 Discounted rate at WACC9% MPS4.2/ 9% = 47 Market value of sporty plc47 * 4 = 188 2) The discount cash flow method generates the maximum value of the organisation. Hence, this would be chosen as a technique to evaluate the total value of the Sporty Plc. All this is a key technique that involve the proper projection about the overall value of the business organisation. The value of the firm is considered as 188 that is effective in respect to the other business venture.The value of company is such effective that it easily motivates the investor to take the acquisition decision in respect to the business venture. There is only one method or technique which is dividend valuation technique that provide a very less value of the company which do not clearly provide a clear assumption over the profitability in respect to acquiring the business venture. Henceforth, it cannot be stated as a fact that the organisation should not consider this
method to be a great assumption for considering the value of the firm and make any acquisition decision in respect to the business venture. The discounted cash flow method further a very beneficial or feasible technique to understand about the value of firm that allow the business venture to identify the overall value of the business unit that is supposed to acquire by the business unit. This has certainly interpreted by the business unit to adopt this technique of identification of the overall value of the business unit to be taken in order to consider the total value of the business unit (Gatuyu, 2019). Every acquisition decision is totally based on the feature of the organisation that demonstrate about the total value of the business unit. In case of the discounted cash flow technique, the total value of the firm is 188 million which is very high and gives very positive understanding in respect to the overall investment that is made in the business unit. From the investor point of view, the potential of the investment to generate healthy return is very significant task. As this is very necessary and significant for the venture to understand the possible amount or value that can be entertained against delivering the total value of return against the investment made in the project. The discounted value technique, the name itself indicate the fact that this technique or method also consider the time value of money as well while evaluating about the investment decision- making. The feature of the technique that include the time value of money make this method or technique use more feasible for the business unit (Sharma and Shukla, 2019). The role of the discounted value technique is very significant and major of the investor and financial expert like to adopt this technique of evaluating about the total value of the company when it comes to determine the investment decision-making of the business unit. This can certainly demonstrate the fact that this method or technique of investment decision making provide a clear overview about the total value that company is undertaking at this point in time of the organization that is supposed to be acquired by the other investor or business unit. Discounted technique is a clear and very feasible method to determine the total value of the business unit as it includes time value of money also. The investor always looks forward to profitability situation every time it takes out any of the investment decision-making of the business unit. The use of this method is very feasible for the business unit as it provides a clear understanding about the total expected return that company can generate. In the current situation, the total expected value of the company is identified as 188 that provide a very positive result in order to identify the expected return that can be generated in
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against to take decision over the investment in the company. The role of the investment decision making is significant for the business unit. Acquisition is a very risky choice as it involves the use of this method of investment decision making that further allow the organisation to make the bets suitable investment decision that can allow and incorporate the most suitable results for the investors. Acquiring the business unit require huge amount of finance so the total value of the firm allow the investor to know whether the investment is going towards the right direction or there is a possibility of facing a huge failure of funds (Andrikopoulos and et.al., 2021). The value of the firm allows the investor to know the market value of the unit which indicate whether the investor bring profit to the investor or investor might face the losses against the investment is made in the project. All this is identified with support of utilising the discounted technique of investment decision-making. Business acquisition is always a tough call for the investor and the total value of firm helps them to know if they have made the right decision.. The total value certainly motivates or demotivate the investor to take on the investment decision-making. Acquisition further contain plenty of option and only such decision is made that generate the best possible value of the organisation or the company that is supposed to be acquired by the business venture or the investor (Pan, Liu and Wang, 2019). This can certainly indicate the fact that the investor can look forward to the result of this technique when it comes to identifying whether the acquisition decision will make any profit or it will lead the investor to face the losses against the acquisition decision is made in the investment. Task 3 1. a.Expected NPV In the present case of RR ltd there are different situation relating to the cash flow which the initial investment of 2000000 will provide. Hence, in order to calculate the NPV that is net present value of the new project of expanding the business in Asian- Pacific markets the NPV will be calculated for each and every situation being provided. Basically in the present situation there are two major condition provided along with the probability of occurring. In case the highest probability of year 1, 1.7 million is being selected YearCash inflows PV factor Discounted cash
@ 15%inflows 117000000.8701478261 228000000.7562117202 Total discounted cash inflow3595463 Initial investment2000000 NPV (Total discounted cash inflows - initial investment)1595463 In case the highest probability of year 1, 1.7 million is being selected Year Cash inflows PV factor @ 15% Discounted cash inflows 117000000.8701478261 219000000.7561436673 Total discounted cash inflow2914934 Initial investment2000000 NPV (Total discounted cash inflows - initial investment)914934 In case lower probability of year 1, 1 million (1.1 million) is being selected Year Cash inflows PV factor @ 15% Discounted cash inflows 110000000.870869565 211000000.756831758 Total discounted cash inflow1701323
Initial investment2000000 NPV (Total discounted cash inflows - initial investment)-298677 In case lower probability of year 1, 1 million (600000) is being selected Year Cash inflows PV factor @ 15% Discounted cash inflows 110000000.870869565 26000000.756453686 Total discounted cash inflow1323251 Initial investment2000000 NPV (Total discounted cash inflows - initial investment)-676749 Expected NPV = ∑ (p * scenario NPV) NPVProbability 1Probability 2Total 15954630.550.6526502.79 9149360.550.4201285.92 -2986770.450.5-67202.325 -6767490.450.5-152268.53 Total508317.86 b.Standard deviation of NPV The standard deviation of NPV is being calculated with help of the function in excel. This is particularly because of the reason that when the standard deviation is calculated then this will provide an idea that how much deviation is being present within the data being provided. The standard deviation outlines the dispersion of the data and how it is related with the average of the population. NPVProbability 1Probability 2Total
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15954630.550.6526502.79 9149360.550.4201285.92 -2986770.450.5-67202.325 -6767490.450.5-152268.525 Standard deviation264965.235 c.The probability in case the NPV is less than zero assuming that the normal distribution of return is a bell shaped diagram. With the above diagram relating to NPV it is clear that the when the probability is zero than the expected NPV is more as compared to the actual NPV. This is particularly because of the reason that when the probability is being used then it provides less NPV and the expected NPV is less in comparison to the actual NPV. 2. With the help of the above calculation it is clear that the use of NPV is very important for the effective working and analysing the performance effectiveness of the project. In the present case, when the higher probability is being used in both the year the NPV is positive and good. But on the other hand, in case the lower probability from the options are being selected then the result is negative which is not good for the company (Gaspars-Wieloch, 2019). Hence, it is advisable to the company to go for the options of high probability. This is particularly because of the reason that it will provide more present value of the future cash flow. Hence, it will be more beneficial for the company.
With the above analysis it is clear that the NPV is essential for the effective evaluation of the project and what is the present value of the future cash flows. The NPV is very important to be used as this will provide that how much is the value of future cash flow in the present. On the other hand, the expected value being attested with the probability provides much wider and accurate data set (López-Marín and et.al., 2021). This is particularly because of the reason that with the help of the EV weighted average of outcome along with probability can be accompanied and calculated. This is necessary in order to provide for the good and accurate results such that the working and profitability of the project can be managed in proper and effective manner. This expected value is based on the probability being provided for the effective calculation of the NPV. The major benefit of using the NPV method with help of probability is that it assists company in dealing with multiple outcomes. Like in the present case, with help of different probability, the various situations were analysed. This is particularly because of the reason that with the various probabilities there were different answers coming and the most profitable situation must be accepted. This is particularly because of the reason that when the NPV is greater than it implies that the project will more successful in the future (López-Marín and et.al., 2021). Hence, it is very necessary for the company to calculate the NPV of the project in better and effective manner. Also, another benefit of using the NPV with probabilities is that it recognises the different possible situation which the company can face while working in the external environment. This is particularly because of the reason that with help of the various probabilities the different situation like good, best, worst and others can be analysed and evaluated. This is necessary because of the reason that it will provide proper knowledge as what is the present value of the future cash flows. But with these benefits there are also some of the drawbacks which can affect the working of this method in proper and effective manner. The major limitation of using the NPV with probabilities is that it takes a lot of time to evaluate all these different situations. Hence, this involves a lot of time and efforts but as a result of this it outlines good and effective outcome to be analysed (Woo and et.al., 2019). Along with this another limitation of using the NPV with probabilities is that the expected value does not provide must of the details relating to the dispersion and this is not good for the company. This is particularly because of the reason that in
the expected value does not highlight the effective dispersion of the data then this will be impacting the work in very tough manner. Along with this, it is also evaluated that both the use of traditional NPV and the NPV with probabilities is very important to be used. The traditional NPV has major drawback i.e. once undertaken company cannot invest in other businesses. Hence, modern NPV provides better and effective working analysis relating to the project such that proper decision need to be taken for the effective working and earning profits of the company (Creemers, 2018). Hence, this will provide a better base to the company for taking decision that in which investment option the company need to invest. This is the most essential criteria because of the fact that when the investment will not be undertaken in proper manner then this will affect the working and profitability of the company to a great extent.
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REFERENCES Books and Journals Akhtaruzzaman, M., Sensoy, A. and Corbet, S., 2020. The influence of bitcoin on portfolio diversification and design.Finance Research Letters.37. p.101344. Andrikopoulos, A. and et.al., 2021. Related party transactions and principal-principal conflicts in publiccompanies:Evidencefromthemaritimeshippingindustry.Transportation Research Part E: Logistics and Transportation Review,145(C). Antonakakis,N.,andet.al.,2018.Oilvolatility,oilandgasfirmsandportfolio diversification.Energy Economics.70. pp.499-515. Belderbos, R., Tong, T. W. and Wu, S., 2020. Portfolio configuration and foreign entry decisions: A juxtapositionof real optionsand risk diversificationtheories.Strategic Management Journal.41(7). pp.1191-1209. Benitez, G. B. and Lima, M. J. D. R. F., 2019. The real options method applied to decision making–aninvestmentanalysis.BrazilianJournalofOperations&Production Management.16(4). pp.562-571. Creemers,S.,2018.Momentsanddistributionofthenetpresentvalueofaserial project.European Journal of Operational Research.267(3). pp.835-848. Gaspars-Wieloch, H., 2019. Project net present value estimation under uncertainty.Central European Journal of Operations Research.27(1). pp.179-197. Gatuyu, J., 2019. Taxing a Digital Economy: Exploring Intangible Assets to Broaden Revenue Base in Kenya.Strathmore Law Review.4(1). pp.103-133. Guesmi, K., and et.al., 2019. Portfolio diversification with virtual currency: Evidence from bitcoin.International Review of Financial Analysis.63. pp.431-437. Liu, W., 2019. Portfolio diversification across cryptocurrencies.Finance Research Letters.29. pp.200-205. López-Marín, J., and et.al., 2021. The Financial Valuation Risk in Pepper Production: The Use of Decoupled Net Present Value.Mathematics.9(1). p.13. López-Marín, J., and et.al., 2021. The Financial Valuation Risk in Pepper Production: The Use of Decoupled Net Present Value.Mathematics.9(1). p.13. Pan, A., Liu, W. and Wang, X., 2019. Managerial overconfidence, debt capacity and merger & acquisition premium.Nankai Business Review International. Thorsen, T. A., 2021.Valuing growth: How to value young growth companies and start- ups(Master's thesis, University of South-Eastern Norway).
Woo, J., and et.al., 2019. Developing an improved risk-adjusted net present value technology valuationmodelforthebiopharmaceuticalindustry.JournalofOpenInnovation: Technology, Market, and Complexity.5(3). p.45.