Finance A the Projects Net essay

Download this essay in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from essay:

58 (YHOO), 13.38 (NKE) and 8.15 (BA). There are many explanations for the differences between the P/E ratios of these companies. One is the expected rate of growth. Each of these companies is operates mainly in one market, and is either the dominant player or in an industry with only one other major competitor. Some of the factors that contribute to the growth rate will contribute to differences in the P/E. For example, the stage of the industry life cycle is important. Nike and Yahoo are in industries that are entering maturity in western markets, but still have significant overseas growth potential. FedEx and Boeing, however, are in fuel-dependent transportation businesses that may be approaching a declining stage.

Another key potential factor is the company's earnings. Nike, for example, as high earnings, which since earnings are the denominator will lower their P/E. FedEx, on the other hand, has struggled in the past year and has seen a decline in earnings. Their P/E would improve under such a circumstance, but their stock price has suffered of late as the expected slump in the economy has damaged their future earnings potential.

Another factor is the dividend payout. In general, dividend payout ratio is considered to be inversely proportional to a company's growth prospects. In this case, Boeing has by far the highest payout ratio, and thus they have the lowest P/E. Nike and FedEx have small dividends, but are still viewed by the market as having growth potential. Yahoo is also seen as a growth company, and they do not pay a dividend. Given the life cycle stage of their industry, the market is not pricing much growth into Yahoo stock, and the stock value may be slightly depressed on the expectation that slower growth and a dividend is forthcoming.

3.a) the expected ex-rights price would be the price of the stock once the rights issue has taken place. In this case, the rights are issued at 11 for 18. The price at issue was 372.5p and the right was for shares at 200p. Therefore, the expected ex-rights price is calculated as follows:

18)(372.5) = 6705 and (11)(200) = 2200. The value of the stock is now 8905 for every 29 shares. This, the ex-rights price, is therefore 307p.

The value of a right at the time of the announcement would be the difference between the expected ex-rights price and the exercise price of the right. So the value of the right at the time of issue would be 307-200 = 107p.

A b) if a shareholder has 900 shares, that is going to be worth 550 rights. The value of the rights, if sold, will be (550) [HIDDEN] = 58,850p. The value of the 900 shares once the company goes ex-rights will be (900) [HIDDEN] = 276,354p. Therefore the total value will be 276,354+58,850 = 335,204.

If the shareholder retains the rights, he will have 1450 shares valued at 307.06 each, for a value of 445,237p. From this, the money paid for the discounted shares must be deducted, a figure equal to (550) [HIDDEN] = 110,000p. This leaves the investor with a value of 335,237.

A c) the rationale for having the issue underwritten is that the company is in poor financial circumstances. Rights issues are typically undertaken as a means for a struggling company to raise capital without going to the debt market. It may be that the company is already overleveraged, or that they may not have any more access to capital. At the time of the RBS rights issue, the company was in need of cash following their purchase of ABN Amro, and the economy had not performed to expectations. This left RBS in a cash crunch.

The reason RBS had the deal underwritten was to ensure that it was entirely sold. The issue was the largest such deal in UK history, which added to the risk that the issue would not sell out. Therefore, RBS used an underwriter to ensure that the deal went through. The underwriters then passed the issue along to sub-underwriters who were able to take the issue to the retail markets.

The underwriting fee for this was £210 million, based on 1.75% of £12 billion. The subunderwriters received 1%, or £120 million. The subunderwriting fee seems low, given that the subunderwriters are the group that bears most of the risk. If the issue is not popular, the subunderwriters become stuck with the rights. Generally, the issue would only become unpopular if the rights were a losing financial proposition. In this case, the rights were not, and the subunderwriters were able to move the issue.

There was some controversy regarding the underwriting fee, but a couple of factors need to be taken into account. One is that the issue was of historically large proportions. To take an issue of this size to market without an underwriter would itself by unprecedented. Furthermore, RBS was in desperate need of the money, as part of a larger restructuring program. For them, to fail to place the issue was not an option. After the first 95% of the issue had been exercised, there remained a portion that had not been. The role of the underwriters at that point would be to either absorb the stock themselves, or scramble to find a potential buyer of the rights. In this case, three of the investment banks were able to place the remainder of the issue for RBS. If anything, this case serves to illustrate the value of the underwriters' role in the new issue process. Without underwriters, RBS would have been in a struggle to place this issue.

A d) Potter's views are somewhat simplistic. He contends that to take up the rights issue would allow the investor to avoid dilution. This is true to the extent that the investor who does absolutely nothing will see dilution. However, no investor of sound mind would consider this a viable option. Instead, the alternatives to consider are to either sell the rights or exercise them. In this case, we can expect the rights to be fairly priced. Therefore, the benefit of the discount is a fallacy. The discount and dilution are priced into the ex-rights price. The price of the right is the different between the market price of the stock and the ex-rights price. Therefore, selling the rights has the same financial result as exercising them. The markets are efficient, so there the choice of either action is revenue-neutral. The only question is whether the investor wishes to acquire more shares in RBS or not, and Potter did not address the rights issue on those terms.

4) a) for this question, the five securities I have chosen are Alliance & Leicester, Alliance Unichem, Amvescap, Anglo American, and Antofagasta. The returns for these five securities are listed are weekly, for the year 2005. The average weekly return for the portfolio is 0.6173054%. The standard deviation of the portfolio's returns is 0.021510327.

A b) the average weekly returns and standard deviations for the securities are as follows:

Alliance & Leicester Avg Return 0.27%; Std Dev 0.018

Alliance Unicom Avg Return 0.14%; Std Dev 0.026

AMVESCAP Avg Return 0.67%; Std Dev 0.052

Anglo American Avg Return 0.95%; Std Dev 0.032

Antofagasta Avg Return 1.04%; Std Dev 0.035

Covariances (right hand side) and correlation coefficients (left hand side) for the pairs are contained in the following table:

A&L

AU

AA

Anto

The average covariance is.000267469, and the average variance is.001199103. So therefore the standard deviation is:

The square root of that number is the standard deviation, so 0.021302493.

In question a, the standard deviation calculated was.00215, so the results of the two methods were very similar.

5) a) the value of options derives from the distance between the strike price and current price, plus time value. The difference between the strike price and current price is the intrinsic value of the option. The time value reflects that the longer the time frame until expiry, the greater the chance that the stock price will move into the money, or further into the money. Therefore, the longer the time until expiry, the more time value the option will have. In the case of the M&S options, when you compare options with the same strike price, the difference in intrinsic value between them in zero. Therefore, the difference in the value of the options is entirely attributable to the time value. November is further away than September; therefore the time value will be greater. This means that the option will trade at a higher price.

A b) if an investor purchases a (long) straddle, the expected payoff will be as follows: The investor will lose the 46.5p that the straddle cost if the stock sits at 210p. With movements in either direction, the investor will be able to exercise one of the options and recoup some of the investment. The investor will break even if the price either rises to 256.5p or falls to 163.5p. The appropriate…[continue]

Some Sources Used in Document:

"Understanding-Rights-Issues-|-Investopedia" 

Cite This Essay:

"Finance A The Projects Net" (2008, October 24) Retrieved December 10, 2016, from http://www.paperdue.com/essay/finance-a-the-projects-net-27363

"Finance A The Projects Net" 24 October 2008. Web.10 December. 2016. <http://www.paperdue.com/essay/finance-a-the-projects-net-27363>

"Finance A The Projects Net", 24 October 2008, Accessed.10 December. 2016, http://www.paperdue.com/essay/finance-a-the-projects-net-27363

Other Documents Pertaining To This Topic

  • Doind a Research Project Pay Green I

    doind a research project pay green? I collected an articles . In order to be able to comprehend how being green pays off, one must concentrate on the relationship between employing environmental attitudes and economic performance at a company level. Being green is especially important in the present and there is a wide range of domains that people have addressed when concerning the concept. "Some studies have shown that students who

  • Security Finance & Payback Security Finance a

    Security Finance & Payback Security Finance A strong effective information security program consists of many layers that create a "defense in depth" (Spontak, 2006). The objectives of information security is to make any unauthorized, unwanted access extremely difficult, easily detected, and well documented. Components of strong defense include firewalls, virus filters, intrusion detection, monitoring, and usage policies. Some businesses are missing the business culture, policies and procedures, separation of duties, and security

  • Finance Financial Management in Non Profit Organizations Financial...

    Finance Financial Management in Non-Profit Organizations Financial management of not-for-profits is comparable to financial management in the commercial sector in a lot of respects; but, certain key variations shift the focus of a not-for-profit financial manager. A for-profit company focuses on prosperity and capitalizing on shareholder value. A not-for-profit organization's main goal is not to augment shareholder value; rather it is to offer some socially attractive need on a continuing basis. Budgeting

  • Finance Financial Assessment of Supervalu

    Since 2010 the organization has demonstrated a decline in revenue of 11.08%. However, one would expect some decline as a result of the divestments took place in 2011. The gross profit for the year ending 2012 was $8,019, which equates to a gross profit margin of 22.21%. However, the operating profit demonstrated a loss of $519, hindered by high ongoing Goodwin and intangible asset charges. However, was a lower operating

  • Finance There Are a Number

    I would advise that Mr. Haskins has to understand that the banks are businesses, and make strategic investments when they think those businesses will pay off. This means that AMD needs to ensure that the banks are happy, in order to secure financing. That means giving the banks what they need to feel secure in this investment. Receivables are not adequate collateral, for a lot of reasons, and ancient

  • Finance and Growth Strategies in

    According to Shim and Siegel (1999), "The price-earning ratio equals market price of stock divided by earnings per share. It is used by potential investors in deciding whether to invest in the company. A high P/E ratio is desirable because it indicates that investors highly value a company's earning by applying to it a higher multiple" (p. 343). A company's P/E ratio is dependent on a number of factors, including

  • Net Cash Flow for the

    The IRR is also known as yield method, and IRR of a project is the rate of discount at which the present value of cash flow is equal to the present value of cash inflow. While IRR base the value on rate of return, the ARR ignores the time value of money and it is not accounting based of return. Under ARR, depreciation is calculated in different methods such as


Read Full Essay
Copyright 2016 . All Rights Reserved