Valuing Shares and Risk Management in Financial Management: A Comprehensive Overview

Part A of the summary discusses the valuation of shares for Millennium Tutoring using different models. Analyst A uses the zero-growth model, Analyst B uses the constant growth model, and Analyst C uses the non-constant growth valuation model. These models help determine the share prices based on assumptions of growth rates and dividends.Part B focuses on risk management, which is an important function of corporate finance. It explains how investors use risk management to mitigate risks and make informed investment decisions. The distinction between systematic and unsystematic risks is discussed, along with the categories of operational, financial, and business risks.  

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Part A: Valuing Shares...............................................................................................................2
a. Understanding the model that has been used by Analyst A for valuing the Millennium
Tutoring:.....................................................................................................................................2
b. Understanding the model that has been used by Analyst B for valuing the Millennium
Tutoring:.....................................................................................................................................3
c. Understanding the model that has been used by Analyst A for valuing the Millennium
Tutoring:.....................................................................................................................................3
d. Identifying the features that affect the differing values of Millennium Tutoring:.................5
Part B: Detecting the risk management which is one of the key functions of corporate
finance:.......................................................................................................................................5
References:.................................................................................................................................9

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Part A: Valuing Shares
a. Understanding the model that has been used by Analyst A for valuing the Millennium
Tutoring:
Zero-growth-Model
Particulars Value
Return on Equity 13.000%
Earnings per share $ 1.500
Share price $ 11.538
The calculation represented in the above table directly highlights the model, which is
being used by Analyst A for valuing the share price of the organisation. The analyst directly
believes that there is no possible increment in growth that will be achieved by the
organisation in near future. Moreover, the analyst assumes that the company will be
profitable in nature but will not grow and remain the small regional company. The analyst
assumes that the total earnings per share are paid 100% as dividends to the investors, which
helps in deriving its share price. The calculation is based on the zero-growth model, which
helps in evaluating the actual share price of the organisation under the relevant assumptions.
Bekaert and Hodrick (2017) mentioned that analyst utilise the data for determining the future
share price value of the organisation.
The share price is estimated to be at the values of $11.538 after applying the zero-
growth model. In addition, the low share price values of the company are estimated due to the
assumptions of no growth prospects. Hence, the low growth prospects are reducing the share
price values of the organization, as the investors have low confidence on future performance
of the company. Furthermore, the share price derived from the valuation is mainly compared
with its current share price to determine whether the company is overvalued or undervalued.

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b. Understanding the model that has been used by Analyst B for valuing the Millennium
Tutoring:
Constant growth Model
Particulars Value
Earnings per share $ 1.5000
Expected dividends 30.000%
ROE 13.000%
Return to investors 12.000%
Share price $ 50.4000
The calculations conducted in the above table depict the share price values that have
been estimated under the constant growth model by Analyst B. The analyst has directly
assumed that the share price of the organisation will face constant growth in future years. In
addition, the expected dividends from the earnings per share price are assumed to be at the
level of 30%. In addition, the share price of the organisation is mainly calculated with the
help of constant growth model calculation, which values the share price at $50.400. The
analyst assumed that the organisation will enter the national market, which will help in
generating constant growth rate (Renz 2016).
The share price of the organisation is estimated to be only at the level of $50.40,
which is calculated with the help of constant growth model. In addition, the valuation directly
indicates that the organisation will project a constant growth rate in its earnings per share,
which will increase the dividend payments in the long run. The constant growth rate ensures
the investors regarding the prospects of the company, which in turn increases their share price
value. The share price under the constant growth rate model is higher than the zero-growth
rate model, as the investors can anticipate the future income growth rate of the company.
c. Understanding the model that has been used by Analyst A for valuing the Millennium
Tutoring:
Non-constant Growth Valuation
Particulars Value

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Dividend $ 1.50
Expected dividends 30%
Growth rate 20%
Required rate of return 12.00%
Constant rate 9.00%
Dividend $ 0.45
Growth 50.00%
Particulars Value Dis-rate Dis-Value
Dividend 1 $ 0.68 0.89 $ 0.60
Dividend 2 $ 0.81 0.80 $ 0.65
Dividend 3 $ 0.97 0.71 $ 0.69
Share price $ 35.32 0.71 $ 25.14
Current share price $ 27.08
The non-constant growth model valuation is mainly depicted in the above table,
which is assumed by Analyst C. The calculations conducted in the assessment is mainly
based on the non-constant growth valuation has mainly allowed the organisation to generate
high level of income from investment. The analyst has assumed that the organisation will
enter the national market but expect high level of growth initially and then the growth will be
constant thereafter. The share price of the organisation is estimated to be at the levels of
$27.08, where growth in dividend is expected to be at the levels of 50% for the first year,
while the second-year growth is estimated at 20%. In addition, the constant growth rate from
third year is at the levels of 9%.
The analyst uses the non-constant dividend model for detecting the share price level,
which is then compared with the current share price to detect whether it is overvalued or
undervalued. The share price level of non-constant dividend is lower than constant growth
rate, as the anticipation of the share price will alter over the period. Barr and McClellan
(2018) mentioned that analyst utilises the growth rate to determine the accurate level of stock
price, which can help in making adequate investment decision.

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d. Identifying the features that affect the differing values of Millennium Tutoring:
The growth rate in dividends is considered to be the most viable feature, which is
affecting the share price valuation of the organisation. In addition, the assumption made by
the analyst regarding the growth on the dividends declared by the organisation is shaping its
overall share price estimation. This estimation is used for detecting whether the company’s
overall the share price is overvalued or undervalued. Hence, from the evaluation it is detected
that the share price of the company has changed under all the three-circumstance presented
by the analyst. This directly indicates that share price of the organisation is affected by the
changing assumptions of growth rate (Marshall 2015).
The analyst can use different model such as FCFF and dividend discount model for
deriving the accurate level of share price for the organization. These models require
additional information from the annual report of the organization, which is not dependent on
the earnings per share and growth rate. Moreover, technical analysis can also be used by the
analyst for deriving the actual trend of the shares, which help in making adequate investment
decisions. The technical analysis projects the current trend of the company under trend
analysis and pattern analysis method.
Part B: Detecting the risk management which is one of the key functions of corporate
finance:
Investors with the help of risk management are able to mitigate the risk factors in their
investment, which allows them to generate higher returns. Moreover, the systematic and
unsystematic risk is defined in the risk management, which allows the investors to make
adequate investment decisions. Furthermore, the organisation by using the risk management
method can eventually reduce the negative impact from the systematic and unsystematic risk.
Both the systematic and unsystematic risk is detected by the risk management methods used
by the organization. Systematic risk that is identified by the risk management procedures are

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considered non-controllable, where mitigation strategies cannot reduce its negative impact on
the operations of the organization. However, unsystematic risk is controllable in nature,
which can be mitigated by using adequate risk management strategies (Valipour et al. 2015).
Unsystematic risk of an organization is adequately divided into operational risk,
business risk, and financial risk, which can be mitigated by adopting adequate strategies.
Operational risk is classified into political risk, people risk, legal risk, and model risk, which
can have negative impact on the operations of the organization. Moreover, the operational
risk highlights the risk from the political background, which can hinder the operations of the
organization and increase the possibility of its nonexistence. Financial risk is considered the
second unsystematic risk, which can deliver negative impact on the operations of the
organization (Haque and Nasir 2016). The financial risk is further classified into sovereign
risk, settlement risk, exchange rate risk, non-directional risk, recovery rate risk, and credit
event risk. However, the financial risk can be mitigated with the help of adequate risk
management strategies. The business risk is identified to be unsystematic risk, which is
classified into funding liquid risk and asset liquid risk. The identified business risk and
directly have negative impact on the operational capability of the company and reduce its
capability to continue its operation. In addition, the asset liquid risk increases when the
management is unable to generate profit from the sale of their assets, where the organization
faces loss due to the loss incurred after selling the asset.
The specific systematic risk is further divided into interest rate risk, market risk and
inflationary risk that negatively affects the overall performance of the organization.
Moreover, the systematic risk is not mitigated by any risk management strategies that can be
deployed by the organization. The further evaluation on the systematic risk directly evaluates
the negative impact of the risk can directly affect the operational feasibility of the
organization in the long run. The first systematic risk that majorly affects the operational

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capability of the organization is the interest rate risk. The interest rate risk is further divided
into price risk and reinvestment risk, which hinders the capability of the organization to
continue its operations smoothly (Jung, Dalbor and Lee 2018). Rising interest rate would
reduce the concern of the investors on the share price of the organization, which will
negatively affect its capabilities to accumulate adequate finance from the market. Moreover,
the rising interest rate would also have negative impact on the reinvestment rate that can be
conducted by the organization. The organization reinvests the declared dividend in the
organization, where it cannot provide the same returns due to higher interest rate.
Inflation risk is the second major component of the systematic risk that increases the
concern for the organization. Inflation risk is further divided into cost inflation risk and
demand inflation, which increase the problems for the organization. The increment in cost
inflation risk directly raises the level of Expenses that is conducted by the organization to
complete its production process. The increment in the expenses of the organization, while the
sales remain same will have negative affect in its revenue generation capability. Moreover,
the demand inflation risk is most problematic for the management, as the specific risk occurs
when the organization is not able to supply in accordance with the rising demand from
customer. This risk paves the way for competition, which can decrease market share of the
organization by not delivering the required product to the customers. Hence, the demand
inflation risk will directly affect the customer base of the organization (Abdoh and Varela
2017).
The third most complex component of the systematic risk is market risk that increases
the problems of the organization at market level. The major components of the market risk
are relative risk, directional risk, absolute risk, non-directional risk, volatile risk and basic
risk. The identified risk direct impact on share price of the business, where the changes in
market volatility have higher risk attributes on the organization. Therefore, the market risk

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negatively affects share price value of the organization by negatively affecting its market
capitalization.
There is specific systematic and unsystematic risk that is affecting the investment
strategy of the organization. Moreover, identified risk can be mitigated with adequate
investment strategies, which reduces the negative impact of the unsystematic risk. The use of
adequate diversification methods would eventually help the organization to minimize the
negative impact of the capital market on created portfolio. The diversification process of the
portfolio would eventually mitigate investments in different sectors and organizations, which
will substantially reduce the negative impact on the investment capital (Haque and Nasir
2016). Furthermore, Investments in cash, stock and Bond would eventually reduce the risk
attributes of the portfolio and allow the company to generate high level of returns from
investment. Moreover, the organization can also use different hedging measures for reducing
the negative impact on the created portfolio. Hedging instruments such as option contract and
future contracts can be used by the organization for reducing the level of risk involved with
the investment. Therefore, the organization can adequately mitigate the risk involved in
investment by utilizing the diversification and hedging process.

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References:
Abdoh, H. and Varela, O., 2017. Product market competition, idiosyncratic and systematic
volatility. Journal of Corporate Finance, 43, pp.500-513.
Barr, M.J. and McClellan, G.S., 2018. Budgets and financial management in higher
education. John Wiley & Sons.
Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge
University Press.
Haque, A. and Nasir, A., 2016. Systematic and Idiosyncratic Risk Analysis of Banking and
Insurance Sector of Pakistan. Abasyn University Journal of Social Sciences, 9(2).
Jung, S., Dalbor, M. and Lee, S., 2018. Internationalization as a determinant of systematic
risk: the role of restaurant type. International Journal of Contemporary Hospitality
Management, 30(8), pp.2791-2809.
Marshall, C.M., 2015. Isolating the systematic and unsystematic components of a single
stock’s (or portfolio’s) standard deviation. Applied Economics, 47(1), pp.1-11.
Renz, D.O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Valipour, M., Amin, V., Kargosha, M. and Akbarpour, K., 2015. Forecasting stock
systematic risk using Heuristic Algorithms. Journal of Productivity and development, 1(1),
pp.36-41.