Finance and Accounting Assignment

Questions: Assignment Task: 1) Assume you have invested half of your savings in a risk-free asset and half in a risky portfolio P. Is it theoretically possible to lower your portfolio risk if you move your risk-free asset holdings into another risky portfolio Q? In other words, can you ever reduce your risk more by buying a risky security than by buying a risk-free asset? (15 marks) 2) Is it possible that the holdings of an open-end fund are worth much more or less than what the shares of the fund are trading for? Explain with clear examples supported and referenced with relevant data. This question is designed to test your familiarity with sources of financial information which you will need collate market for valuation purposes. You will therefore be marked on solid demonstration of this capability (30 marks) 3) If a firm repurchases 1% of its shares, does this change the capitalisation of the stock marketon which it is listed? If a firm distributes 1% of its value through dividends, does thi s change the capitalisation of the stock market on which it is listed? You are required to explain your reasons including: i) Impact of share repurchase on market capitalisationii) Impact dividend payment on market capitalisation Answers: 1. In the share market, traders can mug high instability in the traders portfolio. Occasionally, the trader can have low instability in the traders portfolio. The condition of the market in the share market does not stay in the high-quality mood for long period of time. For a while, the share market can have a better time for the investors and sometimes the share market can have worst time for the investors. The condition of the share market completely depends on the economic condition and the political condition of the country (Xu, Yasinzai and Lev, 2013). If the trader trades some of the traders funds in a risk free assets in portfolio P and some of the traders funds invests in the portfolio which is risky. The trader should carry on their trading by keeping three gears in mind: a) The trader who is trading in the market should keep different types of bonds in the risky portfolio, different types of equity and different types of mutual funds in the risky portfolio. This is because if the trader face bad mood of one asset then the portfolio of the trader can be balanced by the other assets. b) In the portfolio, the trader should not keep only the blue chip shares because the cost of the share which is blue chip is quite high. If the market price of the share which is blue chip, falls down then the trader will face loss and the rate of return from the portfolio will also fall quite harshly (Santoro and Wei, 2008). That is why the research analyst suggest to pick different types of assets in the portfolio which may ensure huge amount of profit from the traders risky portfolio. c) The trader should always think about how to deduce the unsystematic risk to the group whose size is small and are from different industries. The volatility of the portfolio can be reduced by the investor by using the following steps: Beta: The instability of a share can be calculated by beta. The beta of a share means that the market price of the share will be in velocipede. If the worth of beta of a share is equivalent to less than one that means the instability of the share as compared to the overall market situation of the stock is less (Poterba, 2004). If the worth of the beta is more than one that means the instability of the share as compared to the overall market situation of the stock is more and the equity can react further sternly. The trader can minimize the instability by trading the highly rated value beta stocks and substitute them with low rated beta stocks. Hedging: The strategy of hedging means when the investors can gets into the position of long or in the position of short in the stock market and the investor can use the strategy of hedging. When the portfolio is made by the investors, the traders should carry on trading by keeping in mind that all the securities or the stocks cannot provide the profit to the trader (Xu, Yasinzai and Lev, 2013). The investor may face loss while trading in the stock market. To deduce the loss acquired by the traders should hedge their portfolio with various stocks or equities so that the loss faced by the trader from one stock gets reduced by earning a profit from other stocks. Bonds: When the trader has the factor of high risk in the traders portfolio, then the trader may earn less amount of return from the investment of the trader. At the time of earning less money from the investors investment, the trader may try to find a place which is safe to invest the traders investments (Lease, 2000). If the trader wants to reduce the risk factor from the traders portfolio, then the trader can invest the money into the bonds. The trader may earn a huge amount of money by trading the bond. Cash: The trader should have modest amount of money with the trader. This is because at the time inflation if the stock price or the collection of stocks goes downwards then the trader can buy new stocks which will make the portfolio less risky (Idowu et al., 2013). When the stock price goes high the trader can put up for sale out the stocks and can earn a huge amount of profit from the stock which can be reduce the loss occurred by the other portfolio of the stocks. 2. Open ended funds means the compilation of shares which can be reclaim and concern at any time. The fund of open ended is mainly offered in the developed countries. The trader can directly trade the stocks unswervingly from the open ended fund. The other term of open ended fund is big pool of money. The open ended funds have lots of money in the fund. This money belongs to the traders (Xu, Yasinzai and Lev, 2013). The open ended fund is estranged into units. The investors have right to trade at any time in the open ended fund. The funds of the open ended fund get larger in size, when the traders invests their money in the open ended fund. The cost of the unit in the open ended fund is determined in regular basis. The unit price of the open ended fund is computed by the values of equity, the values of bonds and by the values of other resources. This unit price of the asset of the open ended fund gets divided by the total amount of resources (Kari, Karikallio and PirttilaÃÅ'ˆ, 2009). Open ended funds invested in: An open ended fund usually invests in both the shares and bonds. The open ended fund also keeps money in hand for opportunity in the future and the open ended fund also devoted in the derivative market. The money which is kept for the future purpose to control the portfolios are saved (Cohen, 2012). The main reasons for investing money in an open ended fund by the investors: When the trader wants to trade in the open end fund, the fund manager of the open ended fund will direct the trader about the assets which can be purchased by the traders. The major objective of the manager of the open ended fund is to give high return to the trader as compared to the asset investment made by the trader (Bell and Jenkinson, 2001). The major cause of trading the money in the open end fund by the trader is to get the high return. After earning the gain from the trading, the trader will invest again in the open end fund. The trading in the open ended fund will make the fund much bigger. The two main kinds of open ended funds are: Unit trusts: The price of unit trust is dual price. When the trader trades the unit trust, a percentage of money is inculpate by the manager of open ended fund (Krause, 2006). The difference of the cost price and the selling price of the unit trust is the gain margin of the trader. Open ended investment companies: The open ended investment company is consists of single unit price. The unit trust is now transformed into the open ended fund. Forward Pricing: One of the important features in the open ended fund is forward pricing. The major function of forward pricing is while trading the units in the open ended fund, the trader do not know the current price of the unit until and unless the trading gets completed (JordaÃÅ'Æ’o and Sousa, 2010). For example: In the afternoon time at 12 o clock, the fund gets its tag. If the trader wants to trade units in the morning and placed a bid for the unit from the fund. The traders do not have any information about the buying price or the selling price of the unit. 3. 1) Impact of share repurchase on market capitalisation: When a company repurchase the share, which means the company is trying to pay no attention to the taxation part of the industry. Repurchasing of share always make an effect on the dividend policy of the stock holder. The industry is allotting the money to the share holders. This reflects that the company is thinking about the wealth of stake holders (Hopkin, 2008.). Many share holders always wants to keep the shares of the company with the stock holder. This is because when the market price of the stock increases, the share holder thinks that the company will declare dividend to the share holders of the company. At that time some of the share holders repurchase shares of that company to get the high dividend from the company. This will make the stock holders to increase the rights of the company in a superior division. Hypothetically, repurchasing of the stocks of the company will not alter the market price of that exact share in the stock market. The trouble faced by the stock holders are the price of the market of the stocks gets minimised by the total value declared as a dividend to the stock holders (Holmes, 2002). The main cause of this brochure is the company aims on the shares of the company but concurrently, the worth of the company gets deduced by the equivalent quantity of money spent in stocks buy back. According to the rule of taxation, the buying back of shares of the business treats the gain of the business as the total profits. When the stock holders get the income from the business profit, the stock holders have to give taxation to the government. As the dividend earned by the stock holder is fully taxable, that is why the stock holder should pay tax to the government. The dividend earned by the stock holder of a company is treated as the capital gain of the stock holder (Crouhy, Galai and Mark, 2000). Company always thinks about the wealth of the stock holders that is why the company always distribute its profit as dividend and distributes the companys profit to the share holders. Sometimes, the company wants to reinvest the profit in the business, that time the company refused to pay the dividend to the share holders of the company. This will allow the company a rapid growth in the market. This will help the company to reinvest in new project and the company can earn more pro fit. 2) The impact of dividend payment on market capitalisation: The policy of dividend in a company means distributing the profit margin earned by the company among the share holders of the company. Another policy of dividend means the reinvesting the profit earned by the company in the new projects to earn more amount of money. The policy of dividend is related to distributing the profit margin among the share holders of the company and reinvesting the profit margin in the new projects of the company to earn more profit margins. Many analysts of the company studied the impact of dividend policy of the company and came to a conclusion that the dividend paid by the company is treated as the risk factor of the company. The size of the company, the leverage of the company and the dividend policy of the company are dependent on each other. It is treated as the risk factor of the company. If the Beta value of a company is higher, then the company is having high risk factor and the company will pay lower amount of dividend to its share holders (Agrawal, 2009). This reflects a negative amalgamation between the policy of dividend of a company and the risk factor of the company. This shows that if the company has high beta value then the dividend paid by the company is low. Another unification of business analysts studied the associations flanked by the dividend policy to the stock holders and the instability of the current price of the share in the market. When the current price of the business is very unstable in the market, the business should not to pay out the dividend to the share holders of the company if there is high risk factor. If the business still wants to distribute the gain margin between the stock holders of the business, then the concern is thinking about wealth of the share holders and secondly, the corporation wants to be a magnet for more stock holders in the direction of the company so that the stock holder will spend more in buying back of the stocks of the company due to the dividend payment. This will make more efficient to the business fund and can reinvest in new projects of the corporation to get more gain margins from the new projects. When an entity deduces the amount of money by distributing the money as dividend by the con cern to the stock holders, then the entity worth of the equity falls down by the same amount of dividend paid by the concern to its stock holders. References: Krause, A. (2006). Risk management. Bradford, England: Emerald Group Pub. Lease, R. (2000). Dividend policy. Boston, Mass.: Harvard Business School Press. Gleditsch, N. (2002). The peace dividend. Amsterdam: Elsevier. Crouhy, M., Galai, D. and Mark, R. (2000). Risk management. New York: McGraw Hill. Poterba, J. (2004). The impact of population aging on financial markets. Cambridge, Mass.: National Bureau of Economic Research. Holmes, A. (2002). Risk management. Oxford, U.K.: Capstone Pub. Bell, L. and Jenkinson, T. (2001). New evidence of the impact of dividend taxation and on the identity of the marginal investor. London: Centre for Economic Policy Research. Casey, K. (2009). Dividends. [Bradford, England]: Emerald. Kari, S., Karikallio, H. and Pirttila, J. (2009). The impact of dividend taxation on dividends and investment. Munich: CESifo. Libby, R., Libby, P. and Short, D. (2011). Financial accounting. New York: McGraw-Hill/Irwin. Jordao, B. and Sousa, E. (2010). Risk management. New York: Nova Science Publishers. Tuller, L. (2008). The small business valuation book. Avon, MA: Adams Business. Idowu, S., Capaldi, N., Zu, L. and Das Gupta, A. (2013). Encyclopedia of corporate social responsibility. Berlin: Springer. Agrawal, R. (2009). Risk management. Jaipur, India: ABD Publishers. Cohen, M. (2012). The eclipse of 'elegant economy'. Farnham, Surrey: Ashgate Pub. .Jordao, B. and Sousa, E. (2010). Risk management. New York: Nova Science Publishers. Appendix: Tesco has outstanding shares of 10,000 and the total income of Tesco is $ 100,000. The market price of the share of Tesco is $ 40. If the company buys 1 % share repurchase then The current EPS of Tesco is = $ 100,000 / 10,000 = $ 10 per share P/E ratio = $40 / $10 = 4 With a 1% stock repurchase by Tesco Tescos outstanding shares will reduced to = (10,000 * (1 0.10)) = 9000 shares Therefore, Tescos outstanding shares are reduced to 9,000 Therefore, Tescos EPS = $ 100,000 / 9000 = $ 11.12 The Tescos shares trade on 4 times earnings, Tescos new share price will be $ 41, an increase from the $ 40 per share before the share repurchase.