Financial Management Report: Share Valuation and Risk Management

This report provides an analysis of share valuation using zero growth, constant growth, and non-constant growth models, applied to the case of Millennium Tutoring. It discusses how different assumptions about growth rates impact share price. Furthermore, the report explores the crucial role of risk management in corporate finance, differentiating between systematic and unsystematic risks, and examining their various components such as interest rate risk, market risk, inflation risk, business risk, financial risk, and operational risk. The report highlights the importance of mitigating controllable risks to maintain a stable financial position and ensure smooth business operations, emphasizing that while systematic risks are non-diversifiable, unsystematic risks can be managed through appropriate strategies.

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. Indicating the model used for valuing Millennium Tutoring, while detecting its share value:
....................................................................................................................................................2
b. Indicating the model used for valuing Millennium Tutoring, while detecting its share
value:..........................................................................................................................................3
c. Indicating the model used for valuing Millennium Tutoring, while detecting its share value:
....................................................................................................................................................4
d. Discussing the features that derive the differing values of Millennium Tutoring, while
indicating the measure that can improve analyst report:............................................................5
Part B: Risk management is one of the key functions of corporate finance:.............................6
Reference and Bibliography:......................................................................................................9

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Part A: Valuing Shares
a. Indicating the model used for valuing Millennium Tutoring, while detecting its share
value:
Zero growth Model
Particulars Value
Earnings per share (A) $1.50
Return to investors
(B)
12%
Share price (C=A/B) $12.50
The assumption of analyst that presented the report directly indicates that the
organization will remain small with no expected growth rate. Expected dividend payment is
assumed to be at the level of 100% of the earnings. The analyst directly utilizes zero growth
models for analyzing the share price value of the organization. In this model, the share price
value has been calculated to be at the levels of $12.50 for Millennium Tutoring. The zero
group models evaluate the current earnings of the organization with the required rate of return
to determine their actual share price value. This valuation allows the investors to detect the
possible returns, which can be generated from the investment.
The investors only use zero growth models when there are no prospects detected on
the future growth conditions of an organization. There is relevant possibility that the
company is not conducting attitude investments, which is reducing its capability to increase
its current dividend payments. Renz (2016) mentioned that with the help of valuation model
investors are able to determine the current share price value of the organization, which
highlights whether it is undervalued or overvalued. This detection of the overvaluation or
under valuation of share price help the investors to make adequate investment decisions,
which helps in reducing the risk and maximize is the returns from investment.

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b. Indicating the model used for valuing Millennium Tutoring, while detecting its share
value:
Constant growth Model
Particulars Value
Earnings per share (A) $ 1.50
Return to investors (B) 12%
ROE (C) 13%
Expected dividend pay-out ratio (D) 30%
Retention ratio (E=1-D) 70%
Growth rate (F=E*C) 9.100%
Share price [((A*(1+F))*D)/(B-F)] $ 16.93
The above table highlights share price value of Millennium Tutoring under the
constant growth model, which is used by Analyst B for evaluating the performance of the
organization. From the calculation, it is detected that the share price value of the organization
is estimated to be at the levels of $16.93, where the analyst expects a constant growth in its
dividend. The dividend position of the organization is expected to be 30% of the earnings per
share, which has been used in detecting its share price value. Bekaert and Hodrick (2017)
mentioned that with the help of share price valuation, investors are able to detect the level of
improvements, which can be made in their investment decision for curbing the risk involved
in investment.
The analyst directly uses the constant growth model when the organization has been
providing adequate returns to the investor on previous fiscal years. This valuation actually
depicts the analyst future income, which can be generated by the organization. The constant
growth model directly evaluates the share price value of Millennium tutoring at the levels of
$16.93, which is higher than zero growth models. The higher value in share price is due to the
constant growth in income that will be generated by the organization regardless of the
reduction in dividend distribution percentage (Barr and McClellan 2018).

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c. Indicating the model used for valuing Millennium Tutoring, while detecting its share
value:
Non-constant Growth Valuation
Particulars Value
Dividend (A) $ 1.50
Expected dividends (B) 30%
Required rate of return
(C) 12.00%
Growth rate (D) 20%
Dividend (E) $ 0.45
Growth (F) 50.00%
Constant rate (G) 9.00%
Particulars Value (1) Dis-rate (2) Dis-Value (1*2)
D1 [H=E*(1+F)] $ 0.68 0.89285714 $ 0.60
D2 [I=H*(1+D)] $ 0.81 0.79719388 $ 0.65
D3 [J=I*(1+D)] $ 0.97 0.71178025 $ 0.69
D4 [K=(J*(1+G))/(C-G) $ 35.32 0.59315021 $ 20.95
Share price $ 22.89
The calculations conducted in the above table highlights non-constant growth
valuation model, which is used by Analyst C, as it helps in detecting the actual share price of
the organization. The analysis directly assumes that the growth rate is divided into different
values. The dividend growth rate increases at the levels of 50% for one year, after which the
dividend growth rises to 20% for 2 years and 9% indefinitely. This calculation has relatively
allowed the analyst to derive the share price value of Millennium tutorial at the levels of
$22.89. Share price valuation of organization under this non-constant growth model is
relatively at lower level than the constant growth model.
The decline in share price value is due to the reduction in the constant growth rate of
the organization, as assumed by the analyst. The evaluation states that the Share price of the
organization has declined due to the reduction growth prospects. The model directly allows
the investor to analyze the future trends of the dividend payments that will be conducted by

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the organization. Hence, the information can be used for analyzing the accurate level of share
price of the organization (Burtonshaw-Gunn 2017).
d. Discussing the features that derive the differing values of Millennium Tutoring, while
indicating the measure that can improve analyst report:
The major feature that is detected from the Calculation that is deriving the values of
Millennium Tutoring is the change in growth rate of the dividends. The company declared the
dividends, which has alternative growth rate in all the three situations. This has mainly
changed the share price value of the organization, as investors can use adequate model for
detecting its actual share price value. The analyst report has changed with the expectations
that have been made for the organization. This alternative assumption has changed the share
price value of the organization under zero growth model, constant growth model, and non-
constant growth model.
The analyst could use different Calculations and data for identifying the future growth
prospects and share price value of the organization. The identified model is not only used for
deriving the actual share price value of an organization, as investors can use dividend
discount model and FCFF model for deriving the share price value of the organization. The
method actually helps in deriving the actual share price value of an organization by
evaluating different components of the financial report. Moreover, the analyst focuses on the
fundamental models for analyzing the share price value of an organization. The analyst could
also use technical analysis for detecting the share price value of an organization in short term
and long term. The projection of the analyst under technical analysis would help the investor
to detect the current trend of the share price, which supports the investor’s decisions while
conducting Investments (McKinney 2015).

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Part B: Risk management is one of the key functions of corporate finance:
Risk management is considered to be one of the key functions of corporate finance as
it allows the investors to reduce that is composition in their investment. The risk management
helps investors to identify the systematic and unsystematic risk factors that are affecting the
organization. This implies the overall actions for the in action that is conducted by the
organization, which leads to losses. Hence, the risk management method allows the
organization to mitigate certain risk, which can negatively affect its future performance.
There are simply two different types of risk such as systematic risk and unsystematic risk.
The systematic risk relatively highlights reactions that are not controllable by the
organization or are considered macro in nature. Moreover, the unsystematic risk is considered
controllable by the organization or is micro in nature. Hence, the controllable risk is mitigated
by using adequate risk management methods and strategies, where is the uncontrollable risk
negative effects operations of the organization (Karadag 2015).
The systematic risk relatively has different components, which affects the operations
of the organization in the long run. The different types of systematic risk are interest rate risk,
market risk, and inflationary risk. The identified risk directly affects the operations of the
organization and hinders its capability to maintain adequate financial position. Furthermore,
the systematic risk is not controlled by the risk management factors, which fuels the
problematic conditions of the organization. The interest rate risk is further divided in price
risk and reinvestment radius that is faced by the organization while conducting adequate
Investments. The rising interest rate would directly affect the share price of the organization,
which will intern have negative impact on its future prospects. Moreover, the reinvestment
rate risk negatively affects dividends of the organization, which cannot be reinvested with the
same rate of return (Martin 2016).
The second major component of systematic risk is the market risk, which has different
types that is affecting the operations of the organization. The different types of market risk

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are absolute risk, relative risk, directional risk, non-directional risk, basic risk, and Volatile
risk. The different level of risk directly highlights the problems that are faced by the
organization under the market risk. The share price of the organization is subject to the
changes in value of capital market, where alterations in the current market volatility directly
affects the risk of the organization. This market risk negatively affects the share price value
of the organization, which in turn affect its market capitalization.
The third major component of the systematic risk is inflation, which directly affects
the operational capability of the organization. The inflation risk is sub-divided into demand
inflation risk and cost inflation risk. These risks negatively affect the organization's capability
to continue its operations. Demand inflation risk directly increases when the production
function of the organization is at maximum levels. The demand inflation risk only occurs
when the organization is not able to contemplate the rising demand from the customer, which
increases the possibility for the competitors to enter the market. Furthermore, the cost
inflation risk directly affects the organization's overall cost of production, which negatively
affects the profitability conditions (Bryce 2017).
Unsystematic risk of the organization is further divided into business risk, financial
risk, and operational risk. The above-identified risk is controllable by the organization
adequate risk management procedures are applied. The business risk is further divided into
asset liquid risk, and funding liquid, which directly affect the operational capability of an
organization. The Asset liquid risk arises due to the losses that incurs from the inability to sell
the assets at lesser value. Under such risk, the asset is relatively sold less than the book value
of the organization, which negative effects its cash flow. The financial discuss further divided
into exchange rate risk, recovery rate risk, credit event risk, non-directional risk, sovereign
risk, and settlement risk. These financial risks directly affect the financial capability of the
organization to continue with operations without any kind of hindrance. Financial risk is one

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of the major concerns for the organization, which can be mitigated with the help of adequate
risk management procedures. This allows the organization to minimize its effect and continue
its operations smoothly. Moreover, the financial risk directly affect owners funds,. Borrowed
funds and retained earnings of the organization. Operational risk is the last component of
unsystematic risk, which is further evaluated into model risk, people risk, legal risk, and
political risk. The identified operational risk directly affects the operations of the organization
and hinders its capability to continue the actions (Wang 2014).
Systematic risk of the organization is not diversifiable, as the organization have no
control in reducing the negative impact of the risk. Additionally, the investors with adequate
strategies can diversify the unsystematic risk. Firstly, the organization needs to spread
portfolio in different investment vehicles such as bonds, stock and cash, which will
eventually help in minimizing the risk attribute of the formulated portfolio. Moreover, the
diversification process can be applied by the organization while conducting adequate
investment, where the selection process of stock needs to be diverse in nature. Stocks of the
organization need to be picked from different sector, industry, and market capitalization to
minimize the negative impact of the risk attributes on the portfolio. Besides, stocks that are
picked by the organization needs to have different level of risk attributes, as it might help in
creating a Portfolio that can mitigate the negative impact of capital market. Furthermore, the
organization can reduce the negative impact of the portfolio by using hedging measures,
which can help in mitigating the risk attributes of the portfolio and maximize the level of
income from investment (Andreou, Louca and Panayides 2014).

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