Fundamental of Finance: Investment Analysis and Corporate Governance

This finance report delves into various aspects of financial planning, investment analysis, and corporate governance. The report begins with a detailed financial plan, including the calculation of investment values, annual withdrawals, and loan payments. It then analyzes the valuation of corporate bonds, preference shares, and common shares, along with portfolio return calculations. The report also provides a case study analysis of corporate governance practices, examining the termination of McDonald's CEO Stephen Easterbrook and the risk management failures at Mitsubishi's Singapore-based oil unit. The report concludes by discussing the corporate governance structures, financial risks, and internal controls of both companies, offering valuable insights into real-world financial and corporate management scenarios. All these insights are provided to students by a fellow student on Desklib.

Running head: FUNDAMENTAL OF FINANCE
Fundamental of Finance
Name of the Student:
Name of the University:
Author’s Note:

1FUNDAMENTAL OF FINANCE
Table of Contents
Answer to question 1:......................................................................................................................2
Part a:...........................................................................................................................................2
Part b:...........................................................................................................................................2
Part c:...........................................................................................................................................3
Answer to question 2:......................................................................................................................5
Part a:...........................................................................................................................................5
Part b:...........................................................................................................................................7
Answer to question 4:......................................................................................................................8
Part a:...........................................................................................................................................8
Part b:...........................................................................................................................................8
References......................................................................................................................................12

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Answer to question 1:
Part a:
Balance in share portfolio = 750000
Balance in superannuation account = 1200000
Balance in cash = 500000
Rate of return in share portfolio = 12% per annum
Rate of return in superannuation account = 9% per annum
Rate of return in cash account = 1.2% per annum
Years to maturity = 17 years
Annual contribution to the superannuation account = 25000
Value of total investment in 17 years
=
[ ( 750000 × ( 1+12 % ) 17 ) + ( 25000
12 % × ( ( 1+12% ) 17−1 ) ) ] + [ 1200000 × ( 1+9 % ) 17 ] + [ 500000 × ( 1+1.2 % ) 17 ]
= 6371623+5193160+612405
= $12,177,188
Part b:
Investment in trust at the age of retirement = 12177188
Interest on the investment in trust = 8% per annum

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Annual living expenses = 500000
Life expectation after retirement = 23 years
Annual withdrawal = (A)
Applying present value formula of annuity:
12177177=( A
8 % × (1− ( 1+8 % )−23 ))
Solving the above equation, the annual withdrawal would be $1,174,151
Hence, there would be enough amount for the donation after meeting the cost of living from the
annual withdrawals.
Part c:
Cost of the car = 350000
Amount to be utilized from the cash account = 150000
Amount of mortgage = 350000-150000 = 200000
Rate of interest = 6.6% per annum
Term of the loan = 5 Years
Monthly installment payment (A)
Applying present value formula of annuity:
200000=
( A
6.6 %
12
× (1− (1+ 6.6 %
12 )−5 ×12
) )

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Solving the above equation, the monthly installment payment comes to $3,922.60
Please refer to the excel spread sheet for the mortgage amortization table
Part d:
Cost of the car = 350000
Amount to be utilized from the cash account = 150000
Amount of mortgage = 350000-150000 = 200000
Rate of interest = 6.6% per annum
Monthly installment payment = 6000
Term of the loan = (n)
Applying present value formula of annuity:
200000=
( 6000
6.6 %
12
× ( 1− ( 1+ 6.6 %
12 )
−n ×12
) )
200000= ( 1090909 × (1− ( 1+ 0.0055 )−n ×12 ) )
200000
1090909 −1= ( 1+0.0055 )−12 n
( 1+0.0055 ) −12 n=1−0.1833
Taking log in both sides,
−12 n ×log 1.0055=log 0.8167
0.0286 n=0.08794

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n= 0.08794
0.0286
= 3.07 Years
Answer to question 2:
Part a:
Corporate bond:
Face value = 100000
Semiannual coupon rate = 5.75 %
2 =2.875 %
Semiannual coupon payments ¿ 100000 ×2.875 %=2875
Yield to maturity = 6.5%
Term of the bond = 5 years
Total number of coupon payments = 10times
Present value of the bond = ( 100000 × 1
(1+ 6.5 %
2 )
10
)+
( 2875
6.5 %
2
× ( 1− ( 1+6.5 %
2 )
−10
))
= 72627.22+24214.39
= $96,841.60
Preference share:
Face value of the preference share = 100
Rate of preference dividend = 10%

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Annual dividend = 100 ×10 %=10
Cost of equity = 9% per annum
Hence, applying the formula for cost of equity the price that should be paid for the shares can be
computed as follows.
Cost of Equity= Dividend
Value of shares
9 %= 10
Value of shares
Value of shares= 10
9 %
= $111.11
Common shares:
Last dividend paid = 4
Dividend growth rate in first three years = -5%
Dividend growth rate for the 4th and 5th year = 20%
Dividend growth rate beyond 5th year = 5%
Dividend for the first years = 4 × ( 1−5 % )= 3.80
Dividend for the second year = 3.8× (1−5 % )= 3.61
Dividend for the third year = 3.61× (1−5 % )= 3.43
Dividend for the fourth year = 3.43× (1+20 % )= 4.12

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Dividend for the fifth year = 4.12× ( 1+20 % )= 4.94
Dividend for the sixth year = 4.94× (1+5 % )= 5.19
Value of share =
3.80 × 1
( 1+15 % )1 +3.61× 1
( 1+15 % )2 +3.43 × 1
( 1+15 % )3 +4.12 × 1
( 1+ 15 % ) 4 +4.94 × 1
( 1+15 % )5 + 5.19
( 15 %−5 % ) × ( 1+1
= $38.88
From the above computation, it can be observed that the value of bond is $96,841.60,
while the market price is $97,241.16. Hence, investment should not be made in the bond. The
value of preference share is $111.11 and the market price is 109.84. Hence, investment can be
made in the preference shares, as it can generate a capital yield. The value of common share is
$38.88, while the market price is 37.98. Therefore, investment can also be made in the common
shares as there is a capital yield.
Part b:
Total cost of investment = 97241.16 ×1+109.84 × 1000+37.98 ×3000
= $321,021.2
Market price of the portfolio after one month = 97803.96 ×1+110.39 ×1000+38.53 × 3000
= $323,784
Investment return over the month = 323784−321021.2
= $2,762.80

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Answer to question 4:
Part a:
The first article talks about the execution of the Chief Executive of McDonald’s Corp Mr.
Stephen Easterbrook. He was fired from McDonald’s Corp for having personal relationship with
one of the employees and at the same time he was allowed to keep with him stock awards which
was amounted to $37 million and above as well as severance and health insurance of $675,000.
CEO Easterbrook was fired based on the investigation which was conducted by the board of
McDonald’s. According to the investigation it has been found out that the relationship was
consensual but was violated by the company policy. As a result, the shares of McDonald’s fell by
2.7% which was high up to 5% in the F.Y 2019 (Latimes.com, 2019).
The second article talks about Mitsubishi which has shut down its Singapore based oil
unit. The oil unit was shut down after losing 34.2 billion yen by a rogue trader in an unauthorized
transaction. According to the trader, such an incident took place due to “premature” settlement of
the positions of derivatives but Mitsubishi reported that the data in the risk management of Petro-
Diamond has been manipulated by the trader in such a way that it appears to be related to the real
deals of the customers. As a result, the trader was fired by the company and this incident has
raised questions on the internal control system of the risk management of Petro Diamond of
Mitsubishi (Bloomberg.com, 2020).
Part b:
According to the corporate governance of McDonald’s Corporation, they do not consider
themselves as promoters but business people with constructive, solid and permanent ethical
program and their entire business is based on ethics and honesty. The board of McDonalds
believes on maintaining a good corporate governance for fulfilling the obligations of the

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shareholders. There are four values with which McDonald’s operates and these four values are
quality, service, value and convenience. The marketing strategy of McDonald’s include good
reputation and expectation of providing excellent service to the customers. It has set standards
for every branches of McDonalds across the world and they aim at following those standards
without any fail. As per as the financial risks are concerned McDonald’s operates worldwide
with 7% of global profit and it has make UK an important hub for the their shareholders and the
management accounting and the financial reporting are prepared in such a way that they ensure
this food corporation will be always on the top in the present days as well as in the future
(Corporate Governance., 2020). The reason for which the CEO has been terminated was
categorized by the board as the violation of the policy of the company and this type of
termination falls under the category of “without cause” and therefore he is not restricted from
receiving his exit payments and is also entitled to receive his health benefits for the next 18
months. McDonald’s is particular about the company policies and the corporate governance and
the CEO Easterbrook has to sign a separation agreement which says that he needs to cooperate
with the company for the legal matters as well as future investigations and has to refrain himself
for working with the direct competitors of McDonald’s for the next two years. According to the
legal partner of McDonalds, the reason why Mr. Easterbrook has received his severance pay
because he has violated the company policy but he has not violated the law of sexual harassment
(Latimes.com, 2019). However, the company has become the target of American Civil Liberties
Union for tolerating harassment in the workplace and ignoring the safety issues. The company
has decided not to elaborate this matter other than the public statements and findings and Mr.
Chris Kempczinski has been appointed as the new CEO with a salary of $1.25 million per annum
(OVA, J. I. A. S., 2018).

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The corporate philosophy of Mitsubishi is based on the “Three Corporate Principles” and
the group has continuously strives on raising the corporate value. The corporate activities are
based on the principles of integrity and fairness. The company believes that meeting all the
expectations of the stakeholders and the company will also help in enriching the society in terms
of materiality and spirituality. Mitsubishi is concerned with strengthening the corporate
governance as it is a vital subject of the management for ensuing the efficient, transparent and
sound management (Mitsubishi Heavy Industries, L., 2020). The incident has led to liquidate the
Petro- Diamond Singapore Pte after settling the oil and fuel contracts long with the debts. At the
same time, this incident has affected some of the employees which has not been disclosed by the
company and it has reduced the forecasting of net profit from 600 billion yen to 520 billion yen
(Bloomberg.com, 2020). According to the group, they consider risk management as a part of the
governance and it functions only when all the elements like the systems, corporate culture and
human resources are functioning properly. Therefore, they have focused on having the business
risk management which is more organized and can help in the clarification of the roles of the
management, different corporate departments and other business segments. This incident has
also raised questions about the internal control of Mitsubishi though the company has claimed
that the internal control has been in place throughout. The group believes in taking daring and
bold risks for the purpose of succeeding in the global market and also takes necessary steps and
measures for the purpose of managing those risks and this purpose it has formed a business risk
management department which reports directly to the company’s chief executive officer. Thus,
in this way the Mitsubishi group focuses on continuing and increasing the corporate value with
the help of the business participants engaged in the management role of the business (Mitsubishi
Corporation., 2020).

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