University Finance Assignment: Corporate Finance Fundamentals Analysis

This assignment analyzes several key concepts in corporate finance. The first part involves calculating investment returns over a five-year period, including a significant return in 1933, and determining whether this should be included in the return series. The second part discusses the impact of the Euro's formation on arbitrage opportunities. The third section explores why shareholders might not prefer a residual dividend policy, even though positive NPV projects enhance shareholder wealth. Finally, the assignment examines the effects of stock splits and dividends on an investor's share ownership in SplitsVille Corp. The solution demonstrates an understanding of financial concepts such as investment valuation, currency arbitrage, dividend policy, and stock market mechanics, referencing relevant financial literature to support its analysis.

Running head: FUNDAMENTALS OF CORPORATE FINANCE
Fundamentals of Corporate Finance
Name of the Student:
Name of the University:
Authors Note:

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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

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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
r Investment Value Loss in return
1929 5,000.00 50%
1930 3,000.00 40%
1931 1,500.00 50%
1932 1,425.00 5%
1933 3,462.75 143%
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.

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2. Discussing the impact of the formation of Euro on the potential arbitrage
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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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

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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.

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References and Bibliography:
Baker, H.K. and Jabbouri, I., 2016. How Moroccan managers view dividend
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. and Weigand, R., 2015. Corporate dividend policy revisited. 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. and Pesic, V., 2017. Bank regulatory arbitrage via risk weighted assets
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.