Case Bank for International Financial Management.docx
- 文档编号:30236317
- 上传时间:2023-08-13
- 格式:DOCX
- 页数:54
- 大小:701.01KB
Case Bank for International Financial Management.docx
《Case Bank for International Financial Management.docx》由会员分享,可在线阅读,更多相关《Case Bank for International Financial Management.docx(54页珍藏版)》请在冰豆网上搜索。
CaseBankforInternationalFinancialManagement
CaseBankforInternationalFinancialManagement
(0)ObjectiveofInternationalFinancialManagement
Question:
StakeholderobjectivesusingUKasacase
(a)'Theobjectiveoffinancialmanagementistomaximisethevalueofthefirm.'
Youarerequiredtodiscusshowtheachievementofthisobjectivemightbecompromisedbytheconflictswhichmayarisebetweenthevariousstakeholdersinanorganisation.(10marks)
Answer:
Stakeholderobjectives
(a)Ifitisagreedtomaximisethevalueofthefirm,itisnecessarytoasktwofundamentalquestions:
whoisthefirm?
whatdowemeanbyvalue?
IntheUnitedKingdomthetraditionalviewhasbeenfortheinterestsofafirmtoequatewiththoseofthecurrentequityshareholders.Butitisnowrecognisedthatthisismuchtoonarrow.Theemployeesandlenderstoabusinesscertainlyhavealegitimateinterest,probablyalsothegovernment.JapaneseinfluencesonUKthinkingwouldaddacompany'ssuppliersandcustomersaspartofthestakeholders.Perhapsthegeneralpublicalsobelongtothelist.
Eachofthemembersoftheabovelisthasdifferentkeyobjectives.Forexampleemployeesmightwanttheirlabourremunerationtobelarger,whiletheshareholderswantlabourcoststobelowsothathigherprofitscanleadtohigherdividends.Shareholdersmightbeuninterestedwhetherthecompanyinvestsin'unethical'areasofbusinesssuchasarmamentsorcigarettes,aslongastheirinvestmentisprofitable,whilecertainsectionsofthepublicwilldiscourageunethicalproducts.
Thevalueofaninvestmentintermsoffinancialmanagementtheoryisthepresentvalueofthecashreturnsavailablefromtheinvestment.Howeverthisvariesfrominvestortoinvestordependingonpersonaldiscountrate,taxposition,periodofinvestment,etc.Forexamplethevalueofashareboughttodayandexpectedtobesoldinfiveyearstimewillbethepresentvalueofthefiveyearsdividendsplusthepresentvalueoftheexpectednetrealisablevalueattheendoftheholdingperiod.Sothevalueofthesamesharewillbedifferenttodifferentshareholders,andthejobofthemanagerstomaximisethetotalvaluebecomesimpossible.
Afurtherproblemarisesintheconflictbetweenshort-termresultsandlong-termviability.Managersmightbeonannualservicecontractsandthereforearemotivatedtoreportthehighestpossibleshort-termprofits.Thismightinvolvecuttingdownonrevenueinvestmentsuchasmaintainingfixedassets,advertising,researchcosts,etc.Suchapolicyisinthebestinterestsofmanagement,sincetheywillbepaidabonusforreportinggoodresults,butisnotinthelong-terminterestsofthecompany.
Financialmanagersoftendealwiththeaboveconflictsbyadoptingasatisficingapproachratherthananoptimisingapproach.Theyhopetopleaseeveryonebyfollowingmoderatepolicieswhicharenotexclusivelyintheinterestsofoneofthesectionalstakeholdersofthebusiness.
Question:
Fivewealthyindividuals
Fivewealthyindividualshaveeachput£200,000atyourdisposaltoinvestforthenexttwoyears.Thefundscanbeinvestedinoneormoreoffourspecifiedprojectsandinthemoneymarket.Theprojectsarenotdivisibleandcannotbepostponed.Theinvestorsrequireaminimumreturnof24%overthetwoyears.
Detailsofthepossibleinvestmentsare:
ReturnoverExpectedstandarddeviationInitialcosttwoyearsofreturnsovertwoyears
(£’000)(%)(%)Project1600227
Project2400269
Project36002815
Project46003413
Moneymarketminimum100185Correlationcoefficientsofreturns(overtwoyears)
BetweenprojectsandBetweenprojectsandBetweenprojectsthemarketportfoliothemoneymarket
1and20.701andmarket0.681andmoneymarket0.40
1and30.622andmarket0.652andmoneymarket0.45
1and40.563andmarket0.753andmoneymarket0.552and30.654andmarket0.884andmoneymarket0.602and40.573and40.76
Betweenthemoneymarket
andthemarketportfolio0.40
Therisk-freerateisestimatedtobe16%,themarketreturn27%andthevarianceofreturnsonthemarket100%(allforthetwoyearperiod).
Youarerequired:
(a)toevaluatehowthe£1mshouldbeinvestedusing:
(i)portfoliotheory,
(ii)thecapitalassetpricingmodel(CAPM).
Portfolioriskmaybeestimatedusingtheformula:
(15marks)
(b)toexplainwhyportfoliotheoryandCAPMmightgivedifferentsolutionsastohowthe£1mshouldbeinvested.(5marks)
(c)todiscussthemainproblemsofusingCAPMininvestmentappraisal.(10marks)
(Total:
30marks)
Answer:
Fivewealthyindividuals
PossibleportfoliosReturn
Projects1and20.622+0.426=23.6XProjects2and30.426+0.628=27.2Projects2and40.426+0.634=30.8Project2andmoneymarket(mm)0.426+0.618=21.2XProject1andmm0.622+0.418=20.4XProject3andmm0.628+0.418=24
Project4andmm0.634+0.418=27.6
OftheabovethethreemarkedXyieldreturnslessthan24%andwillthereforenotbeconsideredfurther.
(a)(i)Evaluationofinvestmentusingportfoliotheory
Projects2and3
=
=
=11.7%
Projects2and4
=
=
=10.3%
Project3andmm
=
=
=10.2%
Project4andmm
=
=
=9.1%
Summary
PortfolioReturnStandarddeviation
2and327.2%11.7%
2and430.8%10.3%
3andmm24%10.2%
4andmm27.6%9.1%
Conclusions
(1)Projects2and4arebetter(more‘efficient’)than2and3astheyofferahigherreturnandalowerrisk(asmeasuredbystandarddeviation).
(2)Project4andthemoneymarketisbetterthanProjects2and3andProject3andthemoneymarketsincereturnsarehigherandriskislower.
(3)Projects2and4appearsbetterthanProject3andthemoneymarket-muchhigherreturnwithvirtuallythesamerisk.
Itisnotpossibletochoosebetween:
(1)Projects2and3andProject3andmoneymarketor
(2)Projects2and4andProject4andthemoneymarket.
ThisisbecauseProjects2and3offerahigherreturnandahigherriskthanProject3andthemoneymarket.Similarly,Projects2and4offerahigherreturnandhigherriskthanProject4andthemoneymarket.
Tomakeafinalchoiceusingportfoliotheory,itwouldbenecessarytoconsidertheeffectoftheinvestmentontheriskandreturnoftheinvestors’totalportfolioofinvestments,notjustthe2assetportfoliosconsideredabove.Eventhenitmaybenecessarytoconsidertheutilitypreferencesofthefiveindividualsinordertoascertainwhichinvestmentswouldmaximisetheirutility.
(ii)Evaluationofinvestmentusingthecapitalassetpricingmodel(CAPM)(Tutorialnote:
touseCAPMitisnecessarytodotwothings:
(1)Findthebeta()value-themeasureofsystematicrisk-foreachproject.
(2)Findtheforeachportfolioie,eachcombinationofprojects.Thiswillsimplybeaweightedaverageoftheforeachprojectwithintheportfolio.Thisisbecauseisameasureofsystematicornondiversifiableriskandwillthereforenotbereducedwhenprojectsarecombinedintoaportfolio.Thiscontrastswiththeportfoliotheoryapproachwhereitisnecessarytoidentifythestandarddeviation(totalrisk)ofeachportfolio,whichwillusuallybelessthantheweightedaverageofthestandarddeviationsoftheindividualprojects-becauseoftheriskreductioneffectofdiversifying.
Usingcapitalassetpricingmodel(CAPM),=
Project
1
=0.476
2
=0.585
3
=1.125
4
=1.144
mm
=0.2
Portfolio
2and3040.5850.61.125=0.91
2and40.40.585+0.61.144=0.92
3andmm0.61.125+0.40.2=0.75
4andmm0.61.144+0.40.2=0.77
Summary
PortfolioRequiredreturnExpectedreturnExcessreturn
rf+(rmrf)(Expectedreturn
-requiredreturn)
2and316+(2716)0.91=26%27.2%1.2%
2and416+(2716)0.92=26.1%30.8%4.7%
3andmm16+(2716)0.75=24.2%24%-0.2%
4andmm16+(2716)0.77=24.5%27.6%3.1%
Conclusions
(1)Project3andmoneymarketisnotacceptable.Theexpectedreturnof24%islessthanthereturnrequiredof24.2%giventhelevelofsystematicrisk.
(2)Projects2and3,Projects2and4andProject4andthemoneymarketareallacceptableie,theexpectedreturnisgreaterthanthereturnrequiredforthelevelofsystematicrisktakenon.Projects2and4appearbestastheyofferthegreatestexcessreturnoverthereturnrequired.
(b)Portfoliotheoryidentifiesthereturnandtotalrisk(asmeasuredbystandarddeviation)ofeachpossibleportfolioof2investments.Thisriskshouldbereducedfurtherwhenthe2investmentsarecombinedwiththeexistinginvestmentsofthe5individuals.Hencetheriskmeasureforthe2assetportfoliosincludessystematicandunsystematicrisk.
Thecapitalassetpricingmodel(CAPM)makesitpossibletoidentifythesystematicriskofeachofthe2assetportfoliosie,thetotalriskreductioneffectofusingaportfolioistakenintoaccount.measurestheriskthatcannotbeavoided(otherthanbyinvestinginrisk-freesecurities)ie,CAPMassumesthatinvestorsholdthetwoassetsaspartofawell-diversifiedportfolio,inwhichcaseonlysystematicriskisconsideredwhencalculatingtherequiredreturn.
Inthisexample,portfoliotheoryindicatesthatProjects2and3arenotacceptablerelativetoProjects2and4asProjects2and4offerahigherreturnandlowerrisk,whereasCAPMindicatesthatProjects2and3areacceptableinthattheexpectedreturnisgreaterthantherequiredreturn.
(c)ThemainproblemsofusingCAPMininvestmentappraisalaretheunderlyingassumptions:
∙CAPMisaoneperiodmodel.Mostinvestmentappraisalconcernsprojects
- 配套讲稿:
如PPT文件的首页显示word图标,表示该PPT已包含配套word讲稿。双击word图标可打开word文档。
- 特殊限制:
部分文档作品中含有的国旗、国徽等图片,仅作为作品整体效果示例展示,禁止商用。设计者仅对作品中独创性部分享有著作权。
- 关 键 词:
- Case Bank for International Financial Management
链接地址:https://www.bdocx.com/doc/30236317.html