FIN6C2 Managerial Finance: Investment Analysis, Buybacks, and ESG

This report provides a comprehensive analysis of several key areas in managerial finance. It begins with a computation of annual and average annual returns for BP Plc and Shell Plc, along with a calculation of standard deviation and construction of scatter diagrams to visualize the relationship between stock returns and market returns. The report then delves into the justifications for open market repurchases by executives, critically evaluating these justifications and discussing when buybacks become problematic. It addresses the statement that executives are serving their own interests through buybacks and analyzes the implications of this practice. Furthermore, the report examines the challenges faced by investors in a changing market landscape, particularly concerning the classic 60/40 portfolio strategy. Finally, it explores the concept of sustainable finance, its importance in the finance industry, major challenges, ESG investment approaches, and the implications of sustainable finance on the Capital Asset Pricing Model (CAPM). Desklib offers solved assignments and past papers for students.

FIN6C2 MANAGERIAL
FINANCE

Contents
INTRODUCTION...........................................................................................................................................3
TASK 1..........................................................................................................................................................3
Compute the annual returns and average annual returns for the two firms selected............................3
b) Compute the Standard deviation........................................................................................................5
c) Construct a scatter diagram.................................................................................................................6
d) Expected return on the market...........................................................................................................6
e) Obtain the betas of the two firms, and using the information already obtained calculate the
required return of the two firms.............................................................................................................7
TASK 2..........................................................................................................................................................8
What are the justifications given by the Executives for open market repurchases? Critically evaluate
them one by one.....................................................................................................................................8
Explain when buybacks become a problem? Do you agree with proposed solutions, mentioned in the
report, arising from buybacks?................................................................................................................8
Clearly explain the statement that the “Executives Are Serving Their Own Interests”. What is your take
on the above statement mentioned in the report?.................................................................................9
What is your main take away from the report?.......................................................................................9
TASK 3........................................................................................................................................................10
(a) In the article, it is mentioned that “There was nowhere to hide for investors.” Clearly discuss this
statement..............................................................................................................................................10
(b) What is the future holds for the classic 60/40 portfolio? Critically explain......................................10
TASK 4........................................................................................................................................................11
What is ‘sustainable finance’? What is the importance of ‘sustainable finance’ in finance industry?
What are the major challenges it faces?................................................................................................11
Explain the ESG investment approaches and strategies mentioned in the Report................................11
What does the Report mean by “ESG financial ecosystem?..................................................................12
What is the implication of sustainable finance on CAPM which is based on risk and return?...............13
REFERENCES..............................................................................................................................................14

INTRODUCTION
Managerial finance is an essential part since it deals with the business's money and how they
may be utilized to positively contribute to the firm in the lengthy period so that it can reach its
aims and outcomes that were set forth in the beginning.
TASK 1
Compute the annual returns and average annual returns for the two firms selected.
Stock Prices
Year
BP
Plc Shell Plc Market
2011 42.74 73.09 5945.71
2012 41.64 68.95 5320.86
2013 48.61 71.27 6583.09
2014 34.88 60.84 6844.51
2015 31.26 45.79 6984.43
2016 37.38 54.38 6230.79
2017 42.03 66.71 7519.95
2018 37.92 58.27 7678.2
2019 37.74 58.98 7161.71
2020 20.52 35.14 6076.6
2021 26.63 43.4 7022.61
Dividends
Yea BP Plc Shell Plc

r
2011 1.26 2.52
2012 1.98 3.42
2013 2.19 3.56
2014 2.34 3.72
2015 2.4 3.76
2016 2.4 3.76
2017 2.4 3.76
2018 2.43 3.76
2019 2.46 3.76
2020 1.89 1.91
2021 1.29 1.64
Total Returns
Year
BP Plc (in
%) Shell Plc (in %) Market Return (in %)
2011
2012 2.06 -0.99 -10.51
2013 22 8.53 23.72
2014 -23.43 -9.41 3.97
2015 -3.5 -18.56 2.04

2016 27.26 26.97 -10.79
2017 18.86 29.59 20.69
2018 -4 -7.02 2.1
2019 6.01 7.67 -6.73
2020 -40.62 -37.18 -15.15
2021 36.04 28.17 15.57
Average Returns 4.068 2.777 2.491
Standard Deviation 23.53193 21.90029175 13.73204157
Average Returns:
BP Plc: 4.068
Shell Plc: 2.777
Market: 2.491
b) Compute the Standard deviation.
By using the formula of STDEV.S, the standard deviation is computed through the help of excel.
BP: 23.53%
Shell Plc: 21.90%
Market Index: 0.137

c) Construct a scatter diagram.
-50 -40 -30 -20 -10 0 10 20 30 40 50
-20
-15
-10
-5
0
5
10
15
20
25
30
BP Plc and Market Return
-50 -40 -30 -20 -10 0 10 20 30 40
-20
-15
-10
-5
0
5
10
15
20
25
30
Shell Plc and Market Return
d) Expected return on the market
In the UK, long-term Treasury bonds have a risk-free yield of 2.14 percent. By including
it in the market risk premium, this rate can be utilized to determine the anticipated market return.
The market risk premium, in this case, is set at 4%. Now, the CAPM model will be applied to
determine the expected return. This is because the market risk premium in the Capital Asset
Pricing Model (CAPM) is calculated by deducting the risk-free rate from the anticipated market

return. The predicted market return is calculated as 7.144 percent by adding 2.144 percent to the
market risk premium, which is assumed to be 4 percent.
e) Obtain the betas of the two firms, and using the information already obtained calculate the
required return of the two firms.
Beta of BP = Covariance (BP, Market Returns) / (Std Dev of Market)
Covariance (BP, Market Returns) = 0.0169
Std Dev of Market = 0.137
Therefore,
Beta of BP = 0.0169/0.1372
= 0.901
Beta of Shell = Covariance (Shell, Market Returns)/ (Std Dev of Market)2
Covariance (Shell, Market Returns) = 0.0147
Std Dev of Market = 0.137
Therefore,
Beta of Shell = 0.0147/0.1372
= 0.784
CAPM = Rf + β * (Rf – Rm)
Required return of BP= 2.144% + 0.901(4%)
= 2.144 + 3.604
= 5.748%
Required return of Shell = 2.144% + 0.784(4%)
= 2.144 + 3.136

=5.28%
TASK 2
What are the justifications given by the Executives for open market repurchases? Critically
evaluate them one by one.
1. Buybacks are investments in our inexpensive stocks that demonstrate our belief in the
team's growth: This makes perfect sense. However, throughout the last 2 decades, large US
corporations have tended to conduct buybacks in up trends and cut down on them, often
dramatically, in bad markets. They purchase high and sell low if they sell at all. According to
research conducted by the Academic-Industry Research Network, a nonprofit that I helped start
and head, corporations that do repurchases rarely resale the stocks at higher prices.
2. Buybacks are required to counter earnings estimates dilution whenever workers execute
share options: In any event, there is no clear economic basis for returns to counter dilute from
equity compensation execution. Options are intended to encourage staff to work harder today in
order to generate larger future profits for the corporation. As a result, instead of spending
company resources to improve EPS right away, CEOs should be content to wait for the
opportunity to encourage effect.
3. Since our firm is matured and has exhausted all financially attractive prospects, we
should return superfluous capital to shareholders: Companies that have developed productive
skills over time generally have significant operating and financial benefits while entering related
areas. One of the primary responsibilities of senior executives is to identify new possibilities for
their competencies. Whenever they rather choose to do significant open-market buybacks, it
makes us wonder of whether such managers are still doing their duties.
Explain when buybacks become a problem? Do you agree with proposed solutions, mentioned in
the report, arising from buybacks?
Not all buybacks are bad for the economy. Tender offers and open-market repurchases are
the two main forms. In the latter, a firm approaches investors and proposes to buy it back their
interests at a specified value by such a specific relatively close deadline; those who find the price
acceptable submit their interests to the business. Takeover proposals can be used by executives
who have significant ownership shares in a business and are concerned about its lengthy viability

to reap the benefits of a weak company's stock and consolidate management with their own
control.
Yes I am agreed with proposed solution that mentioned in the report in regard of buybacks
because these are based on the practical activities. In generally, whenever a corporation starts
buying stocks over what turn out to be high prices, the value of a stock held the remaining
owners is reduced. "Buybacks over inherent worth punish the ongoing owner," Warren Buffett
remarked in a letter to Berkshire Hathaway stockholders in 1999. "Buying dollar notes at $1.10
is not a wise investment for all those who stay." Company executives feed such hope by
engaging in share repurchases to influence the marketplace. Apple only ever received $97
million from public stockholders at its IPO in 1980.
Clearly explain the statement that the “Executives Are Serving Their Own Interests”. What is
your take on the above statement mentioned in the report?
As I have stated, there is a far simpler and more plausible reason for the growth in open-
market buybacks: the growth in equity remuneration. Stock-based incentives, when coupled with
Wall Street influence, make chief execs tremendously incentivized to conduct massive and
systematic buybacks. Recommend the right ten repurchasers, having spent an average of $859
billion on buybacks from 2003 to 2012, equal to 68 percent of their aggregate net profits. During
this period, its CEOs each got an average of $168 million in remuneration. On aggregate, share
options accounted for 34% of their total remuneration, while stock awards accounted for 24%.
During the ten years, the next four greatest top officials at any of these corporations each
took an average of $77 million in compensation—27 percent in company stock and 29 percent in
cash incentives. However, just three of the ten largest allow the rapid Mobil, IBM, and Procter &
Gamble—have exceeded the S&P 500 Indexes during 2003.
What is your main take away from the report?
Much of the blame may be attributed to the diversion of company profits to share
buybacks. Examine the 449 firms in the S&P 500 index that went public between 2003 and
2012. Throughout that time, those firms spent 54 percent of their revenues (a total of $2.4
trillion) to buy it back their own shares, nearly entirely via international market acquisitions.
Dividend income consumed an estimated 37% of their profits. This left very little room for

increases in employee skills or raises in staff wages. The repurchase wave has grown so vast, in
effect, those indeed investors, the assumed benefactors of all this business generosity, are
concerned.
TASK 3
(a) In the article, it is mentioned that “There was nowhere to hide for investors.” Clearly discuss
this statement.
For many years, a 60/40 balancing strategy has been the cornerstone of investing
portfolios, with managers allocating 60% to stocks for capital growth and 40% to treasuries for
dividend and risk avoidance. This has worked effectively in recent years, as stocks have risen in
a relatively close line to record highs as borrowing rates have fallen to new lows, driving up
borrowing costs. However, this paradigm is currently under major threat. As traders come to
terms with the realisation that the 60/40 approach that has worked them well for generations may
no longer be viable, some are glad that stocks and treasuries were just down around 5% in the
first quarter. "Traditional portfolios are in significant difficulty," said Duncan MacInnes, a
development of enterprises at Ruffer, a £25.3 billion investment adviser. "Cross-asset linkages
are substantially larger than they had been, there is an appearance of industry variety."
Everybody is performing worse off than they expected."
(b) What is the future holds for the classic 60/40 portfolio? Critically explain
According to Goldman Sachs Asset Management, the conventional 60/40 portfolio
achieved an annualized return of 11.1% from 2011 through 2021, or 9.1% after accounting for
inflation. However, hedge funds cautioned that such gains from a diverse portfolio do not appear
to be consistent over the next decades. As investors come to terms with the realisation that the
60/40 approach that has worked them so well generations may no longer be viable, some are glad
that stocks and treasuries were only dropped around 5% in the first half.
"A fundamental issue for shareholders is that 60/40 does not appear to have much return
potential," says Peter Van Dooijeweert, head of multi asset solutions at $148.6 billion investment
company Man Group, adding that this builds a specific instance for diversification into currency
pairs, commodity markets, and so-called real assets such as infrastructure and property
investment. He did warn, though, that "it's simple to say you have to diversified, but it's not that

simple to execute, particularly when types of investments like materials have had tremendous
movements up and no one forgets oil was at levels lower only two years ago."
TASK 4
What is ‘sustainable finance’? What is the importance of ‘sustainable finance’ in finance
industry? What are the major challenges it faces?
Sustainable finance is commonly defined as the process of taking ecological, social, and
economic aspects into account when deciding to invest, resulting in increasing lengthier
expenditures in stable economic programs and events. Its expansion has been fueled by donors'
wish to create an ecological and sustainability effect in addition to the financial success of their
investments. This expansion is a reaction to a bigger trend that has seen numerous governments
throughout the globe organizes potential to respond to global progress. Financial is now playing
an active role in attempting to integrate these notions in the investment practise.
Importance: The financial industry wields great influence in terms of funding and raising public
awareness of environmental concerns, whether by enabling for the discovery and application of
alternative energies or by backing enterprises that adhere to equitable and efficient labour
standards. Sustainable finance is described as investment choices that consider an industrial
action's or project's ecological, social, and governance (ESG) considerations.
Major challenges: The convergence of financial and non-financial information is one of the
fundamental difficulties of sustainable finance. In this sense, there are two driving forces: one
governmental and one personal. The European Union and the United States appeared to be
competing to set global sustainability goals finance. In this sense, ESG rating firms have banded
together under the American banner, despite the fact that the European Union's Sustainable
Finance Plan plainly gives it a strategic advantage.
Explain the ESG investment approaches and strategies mentioned in the Report.
ESG investing techniques often take one of six basic forms, dependent on how comprehensively
the investment firm intends to use the ESG methodology. The OECD, the Global Sustainable
Investing Alliance, and the CFA Institute are some of the organisations that categorise corporate
sustainability techniques.

The first kind is "exclusion" or "avoidance," which refers to the rejection of corporations and
governments when actions are inconsistent with core social norms.
A second type is "rules-based" or "inclusionary screening," which seeks to include or increase
the participation of issuance who adhere to international norms such as those established by the
OECD and UN 47. This can involve "best in class" investment, in which businesses that score
above specified ESG standards are included.
The third type, which is often a step after incorporation, is the reconfiguration of the company's
funds using ESG scores, with a greater tilt of portfolios exposures towards companies with better
ESG ratings and further from companies with lower ESG scores.
The development of ESG thematic foci wherein at minimum one of the environmental, social, or
political domains is the fourth kind. Conceptual strategy might be primarily financial or value-
driven.
Strategies
In the current state of conflict in ESG ratings, several tactics are being attempted to capture value
via bottlenecks. ESG momentum is one approach that attempts to participate in companies that
show indicators of substantially raising their ESG rankings in the upcoming. Corporate
sustainability may assist support the advantages of momentum methods by proactively
interacting with business leaders to encourage improvements that boost ESG ratings.
Furthermore, several articles imply that mixed approaches, which mix ESG and basic investing
principles, might help produce higher danger returns.
What does the Report mean by “ESG financial ecosystem?
Further evaluation of the ESG financial economist necessitates a look at the numerous
different organizations and groups that continue to affect the growth of ESG measurements and
methodology. Several stockmarkets have issued guidelines on ESG reporting. By interactions
with professionals, the FASB, the National Institute of Investee Companies, and several
organisations that specialise primarily on one of the subjects (E, S, or G) assist create this.
Several players give similar recommendations to aid with the following two weeks.

These makers and makers are featured since individuals (and others who have not been named)
have both enhanced understanding and policy significance of the use of data that is essential for
managers to buy for lengthy investment, for both financial and emotional benefits.
ESG facilitators are organisations that interact with market players to establish
expectations, norms, and regulations for ESG disclosure. Transactions play a crucial role in this
area, especially given that they are offering explicit guidelines on Environmental disclosure,
especially listing regulations. Currently, a number of regulators operate as facilitators, and
taxonomies and specific recommendations are being established in several jurisdictions, notably
in the European Union, to elevate such positions to more official norms.
What is the implication of sustainable finance on CAPM which is based on risk and return?
Sustainable finance entails making financial decisions that take into account not only
financial returns but also ecological, social, and governance considerations. It is a wide phrase
with numerous definitions depending on context and is frequently used alternatively with "green
finance." Sustainable finance entails making investment decisions that take into account not only
investment rewards but also ecological, societal, and governance considerations. It is a wide
phrase with different meanings depending on the circumstances and is frequently used similarly
with "green finance."

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