Investment Strategies and Corporate Finance Management Report

This report provides an analysis of investment strategies within corporate financial management, focusing on RR Ltd's private pension scheme and the importance of diversification. It evaluates different investment valuation methods, including price-earnings ratio, dividend valuation, and discounted cash flow, determining that the discounted cash flow method offers the most accurate valuation for Sporty Plc. The report emphasizes the significance of balancing risk and return in investment decisions and highlights how diversification reduces risk while potentially increasing returns. It also discusses the impact of investment choices on a company's overall financial health and the importance of effective portfolio management. Desklib offers a platform to access this and many other solved assignments.

Corporate Financial
Management

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

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 dividend 9
Growth rate 4%
Risk free rate 5%
Beta 1.15
Number of share 40

Return on market 12%
Value of firm: Rf +(Rm-Rf) Beta
13.05%
Market value per share 2 * (1 + 4)/ (13.05 – 4)
= 1.105
Market value of sporty plc 44.2 (40 * 1.105)
Discounted cash flow method
Net income 4.2
Free cash flow 4.2
Discounted rate at WACC 9%
MPS 4.2 / 9%
= 47
Market value of sporty plc 47 * 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

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
Year Cash
inflows
PV
factor
Discounted
cash

@
15% inflows
1 1700000 0.870 1478261
2 2800000 0.756 2117202
Total discounted cash
inflow 3595463
Initial investment 2000000
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
1 1700000 0.870 1478261
2 1900000 0.756 1436673
Total discounted cash
inflow 2914934
Initial investment 2000000
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
1 1000000 0.870 869565
2 1100000 0.756 831758
Total discounted cash
inflow 1701323

Initial investment 2000000
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
1 1000000 0.870 869565
2 600000 0.756 453686
Total discounted cash
inflow 1323251
Initial investment 2000000
NPV (Total discounted
cash inflows - initial
investment) -676749
Expected NPV = ∑ (p * scenario NPV)
NPV Probability 1 Probability 2 Total
1595463 0.55 0.6 526502.79
914936 0.55 0.4 201285.92
-298677 0.45 0.5 -67202.325
-676749 0.45 0.5 -152268.53
Total 508317.86
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.
NPV Probability 1 Probability 2 Total

1595463 0.55 0.6 526502.79
914936 0.55 0.4 201285.92
-298677 0.45 0.5 -67202.325
-676749 0.45 0.5 -152268.525
Standard deviation 264965.235
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