Principals of Finance Assignment Sample

Introduction

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Part A

Question 2

A.

Hedging is nothing but the reduction of the risk on the retain of the investment and the techniques are the main factors of the internal or external hedging, based on the hedging techniques Platinum plc can follow the four main techniques for the internal hedging and regarding the foreign market transactions.

“Netting”

One of the simplest ways of reducing the risk of the foreign exchange is the netting of the foreign transaction that is mainly based on the foreign exchange market. This process is the netting of the transacted amounts with the associated companies that are related to trading (Iswarya, 2021). The mere settlement of the owned amounts of the companies is the main factor of these techniques that Platinum plc can easily implement. At the same time, the bilateral netting reduces the transactions between two companies based on which the hitting of the exchange risk will reduce.

“Leading and lagging” 

The leading is the payment of the day tiers and the taxes in advance based on the market condition and the lagging is just the opposite of the leading process. The market condition is the main factor in both processes (Sudiarta, and Setyawan, 2022). The increasing risk and the rates of the foreign market cause the Leading process and the reduction of the downtrend interest rates are the main cause of the lagging process. 

“Price variation”

The fluctuation of the prices based on the market is the main factor in the price evaluation. The increasing rates of the foreign market cause the increase in the value of the sale and vice versa. 

“Managing of the Assets and the Liabilities”

According to the aggressive financing policy, the managing of the assets and the liabilities can reduce the tax burden or the risk factors of the foreign market. Besides the management of the asset and liabilities, the company can also reduce its exposure liabilities regarding borrowings and creditors.

Calculation of the net receipt and payment based on money market and forign market exchange.

net stirling payment for 3 months
present	3 months
US deposit rates
Payment	$ 60,000.00	2	$ 120,000.00
Buy at spot	1.35	UK borrowing rates
Immediate payment	£ 44,444.44	6.5	£ 72,222.22	Payment
forward market hedge	$120000/1.29	£ 93,023.26

Table 1: Net Stirling Payment for 3 months

net sterling receipt
present	3 months
US deposit rates
Payment	$ 139,200.00	2	$ 278,400.00
Buy at spot	1.35	UK borrowing rates
Immediate payment	£ 103,111.11	6.5	£ 167,555.56	receipt
forward market hedge	$278400/1.29	£ 215,813.95

Table 2 : Net Stirling Receipt for 3 months

According to the calculation of the receipt and the payment in the foreign market Platinum plc will be benefited with the help of the money market calculation as it lowers the value of the payment. At the same time, it also maintains the value of the receipts exempting the forward rates.

Question 3

A.

According to the basic concept of the weight issue and the bonus issue of shares are normally the prize or the reward to the shareholder regarding their long time holding. On the other hand, the right issue is the offer price of the shares based on the long-term ownership of the shareholders. According to the right shares, the shareholder gets the benefit to purchase the share less than the market price (Sabri and Sarsour, 2019). Apart from these the bonus shares are free to the shareholders. Therefore the pricing is the basic difference of the two shares regarding the shareholders.

B.1

calculation of the no of shares and the value of the shares
Particulars	amount
price earning ratio	10
earning per share	1.25
value of the shares	12.5
value of the right shares	10
required capital	60000000
no of ordinary shares for the required capital	4800000
no of right shares for the required capital	6000000

Table 6: Calculation of the no of shares and the value of the shares

According to the calculation the value of the right shares and the number of shares that need to be issued based on the acquisition of the required capital is calculated on the basis of the current and right share values (Marisetty,and Babu,2018). The face value of the shares has been determined with the help of the PE ratio. The P/E ratio and the earnings per share have given, based on the data the value of the shares is reflected at 12.5. At the same time, the discount of 20% helps to determine the value of the right shares which is 10. Therefore, the number of ordinary shares for the required capital is 4800000 and the right shares that need to issue are 6000000.

expected theoretical ex right price	assumed
Particulars	amount	((30000000*12.5)+(10*new right))/(30000000+new right)
ordinary issue	4800000	5714285.714
right issue	6000000
ordinaries share price	12.5	12.5
right share price	10	10
existing ordinary shares	30000000	30000000
prices	12.155172	12.1

Table 7: Calculation of expected theoretical ex right price and right value

The table shows the calculation of the expected ex share price based on the existing and the new issue of the shares. The key factors of the calculation are the prices of the shares and the number of shares issued. Based on the calculation the price has been determined at 12.155.

3.

At the same time, the expected theoretical price of 12.10 requires a different amount of new issue shares. According to the table, the determination of the expected ex-share prices value depends on the existing and the new share prices ( Efing, et al. 2018). The expected price mentioned therefore the new issue of the shares will change. The basic rules of the ex-share valuation help to determine the no of new issue shares and the value is determined at 5714285. The valuation is mainly based on the required capital of the company.

4.

According to the viewpoint of the company, the calculation of the value of the right share is quite difficult. The company needs to consider the discounting factors of the market and the valuation of the shares also. The company decided to prove an effective discount to the shareholders based on the time of their holding (Pokharel, 2018). At the same time the company needs to reduce the value of the shares for the right issue as a result they need to issue more shares for the capital acquisition from the shareholders. The main difficulty of the valuation of the shares is the determination of the discounting rates based on which the shareholders will purchase the shares. The shareholder entertains their rights based on the discounts if there is an effective amount discount the shares will be purchase. 

Question 4

a.

The capital market line is nothing but the Sharpe ratio of the provided data. According to the ratio the risk-free rate of the UK market is 1.3%, expected return on the investment of the UK market is 10% assumed. Therefore the standard deviation of the market stands at 0.07. Based on the data the equation will be [risk-free rate _ S.D or portfolio *(market return- risk-free rate)/ S.D of the market portfolio]. On the other hand, the equation for the security market is [required return= risk-free rate of return + beta ( market return- the risk-free rate of return). Based on the data of the company the capital market equation or the Sharpe ratios can reflect.

B.

covariance of the three portfolios with the market securities
security A	security B	security c	market
0.003	0.0179	-0.006	-0.0173375

Table 8: Calculation of covariance

According to the calculation the relation of the three securities with the standard rate of the market have reflected in table . The first two securities have positively correlated and the last is negative (Beckmann, et al 2020). Therefore, security B is the best option for the company regarding investment. At the same time, the covariation of security C is the worst and it needs to avoid for the investment. 

C.

According to the calculation of the beta, the value of the Beta Of the security B is higher than others. The security b is positively correlated with the market and it is the main reason for the hike in the value of the Beta. At the same time, security C negatively correlated. Therefore, the value of the beta is low. 

Beta
standard deviation of the market	0.7	beta
security a	0.2	0.29
security b	0.3	0.43
security c	0.08	0.11

Table 9 : Calculation of Beta

Expected returns
security a	0.858
security b	0.798
security c	1.219

Table 10: Calculation of expected returns

At the same time the expected returns of the three securities are the reverse of the value of the beta and the covariance. Therefore, security C consists of risk and according to the risk, the return against the security is higher than the other.

D.

portfolio	0.27
standard deviation of security A and B	0.07
expected return	0.019

 Table 11: Calculation of S.Dand the expected returns of new portfolio and

According to the determination of the standard deviation of the new portfolio the security 2 and a have taken (Beckmann, et al 2020. Therefore the standard deviation stands at 0.07 and the expected return of the portfolio is calculated at 0.019. The expected return is mainly based on the return against the market standard and the standard deviation of the new portfolio. 

Part B

Question 5

A.

Offer for sale

According to the basic concept of an offer for sale it is the basic issue for the shares by the shareholder for the reduction of their personal holdings. The offer for sale is nothing but the mechanism or process that allow the promoters or the shareholder to offer the share with the help of the companies transparency. Based on the offer the base price of the shares will be eaten with the help of the shareholder or the outside investors. The buyers need to bid the prices regarding the base price therefore the selection of the buyers and the allocation of the shares will be on the acceptance of the base price (Engel and Wu, 2018). At the time of the offering and the purchase the bu\uyer needed to have an demat account and the offline trader can also buy shares with the help of the assigned dealer or the broker. Main advantages of the offer for sale is the buyer will get the base discounted price of the shares and the out also nsa\ves time of the buyer. On other hand there are no extra charges or the brokerage regarding the buying and selling of the shares. 

Offer for Tender

The tender of the shares is the offerings of the old shareholder regarding the regaining of the shares and to acquire more interest from the company (Dwivedi, et al. 2022). According to the tender offer the value of the shares is higher than the base value of the shares.

According to the issue of the shares the these two processes can be one of the best options as it consumes less time and costs less and the buyers can easily access their shares. Based on the process the issue of the shares and the stocks will benefit the company.

B. Benefits of P/E ratio

The P/E ratio reflects the relation of the share prices and the value of the expected returns in future (Giri, 2018). Based on the P/E ratio the investors can get proper information regarding the investment of the shares. Therefore the P/E ratio is the main factors for the inventors regarding investment.

Limitations

On the other hand, the P/E ratio does not reflect any information about the effective growth of the company as well as the fundamentals also. Based on the ratio the inventors will not get any information’s about the EPS in future.

Reference list

shahucollegelatur , 2021. internal hedging techniques for foreign market risk available athttps://www.shahucollegelatur.org.in/Department/Studymaterial/comm/bcom3yr/2%20Instruments%20and%20Techniques%20of%20Risk%20Management.pdf (accessed on , 22^nd July, 2022)

Iswarya, S., 2021. Development of hedging strategy for exporters and importers succoured by multi-criteria decision-making techniques (ahp and waspa). Turkish Journal of Computer and Mathematics Education (TURCOMAT), 12(10), pp.5716-5722. https://www.turcomat.org/index.php/turkbilmat/article/download/5384/4491 (accessed on , 22^nd July, 2022)

Tiwary, A.R., 2019. Study of currency risk and the hedging strategies. Journal of Advanced Studies In Finance (JASF), 10(19), pp.45-55. https://mpra.ub.uni-muenchen.de/93955/1/MPRA_paper_93955.pdf (accessed on , 22^nd July, 2022)

Sudiarta, B.H. and Setyawan, I.R., 2022. DETERMINING FACTORS OF HEDGING DECISIONS IN INDONESIA STOCK EXCHANGE. Jurnal Muara Ilmu Ekonomi dan Bisnis, 6(1), pp.95-103. https://journal.untar.ac.id/index.php/jmieb/article/download/11909/10091 (accessed on , 22^nd July, 2022)

Sabri, S.R.M. and Sarsour, W.M., 2019. Modelling on stock investment valuation for long-term strategy. Journal of Investment and Management, 8(3), pp.60-66. https://www.academia.edu/download/60877517/Modelling_on_Stock_Investment_Valuation_for_Long-term_strategy20191012-79978-14x5iz1.pdf (accessed on , 22^nd July, 2022)

Marisetty, N. and Babu, M.S., 2018. Impact of Corporate (Bonus Issue) Action on Stocks in India. International Journal Of Information And Computing Science, 5(12). https://mpra.ub.uni-muenchen.de/87996/16/MPRA_paper_87996.pdf (accessed on , 22^nd July, 2022)

Efing, M., Hau, H., Kampkötter, P. and Rochet, J.C., 2018. Bank bonus pay as a risk sharing contract. HEC Paris Research Paper No. FIN-2018-1285. https://www.econstor.eu/bitstream/10419/198855/1/cesifo1_wp7495.pdf (accessed on , 22^nd July, 2022)

Pokharel, P.R., 2018. A Survey of Investors preference on stock market: A case of Nepal Stock Exchange. Saptagandaki Journal, 9, pp.53-61. https://www.nepjol.info/index.php/sj/article/download/20880/17147 (accessed on , 22^nd July, 2022)

Beckmann, J., Czudaj, R.L. and Arora, V., 2020. The relationship between oil prices and exchange rates: Revisiting theory and evidence. Energy Economics, 88, p.104772. https://www.sciencedirect.com/science/article/am/pii/S0140988320301122 (accessed on , 22^nd July, 2022)

Engel, C. and Wu, S.P.Y., 2018. Liquidity and exchange rates: An empirical investigation (No. w25397). National Bureau of Economic Research. https://www.nber.org/system/files/working_papers/w25397/w25397.pdf (accessed on , 22^nd July, 2022)

Dwivedi, Y., Nandan, T. and Agrawal, P.R., 2022. The Pricing Behaviour on Buying-back IT Companies’ shares in India. Journal of Positive School Psychology, 6(2), pp.5280-5288.https://journalppw.com/index.php/jpsp/article/download/3124/2043 (accessed on , 22^nd July, 2022)

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