Escolar Documentos
Profissional Documentos
Cultura Documentos
2- Management,s perspective:-
Non- payment of dividend was due to poor profitability and
to use the available funds for company operation .
Company was care full in not using borrowed funds an it may
lead to financial distress and ultimately toward bankruptcy.
Large management carry two tiers of leadership that allow
shareholders and management to work together in the best interests
of the firm investors elect a board of directors that is led by the
chairman of the board. The board of directors then hires management
to run the daily operations of the company. The chief executive officer
is the top manager, while the chief financial officer is responsible for
the financial standing of the company management will finance
themselves by issuing debt and selling equity ownership stakes as
shares of stock. There are several considerations that factor in to a
management decision as to whether to issue dividends. The
management must make interest payments to creditors to remain
solvent, but it has deciding whether to return profits to shareholders in
the form of dividends. Interest payments are tax-deductible costs, but
dividends are paid out of net income. Further, preferred stock carries
rights to receive dividend payments prior to Common stock equity.
3. Perspective of shareholders:
In General:
The ethical perspective is that businesses have an obligation to
conduct themselves in a way that treats each stakeholder group fairly.
This view does not disregard the preferences and claims of
shareholders, but takes shareholder interests in consideration only to
the extent that their interests coincide with the greater good. The
integrated perspective. The third approach, the integrated perspective,
suggests that firms cannot function independently of the stakeholder
environment in which they operate , making the effects of managerial
decisions and actions on non-owner stakeholders part and parcel of
decisions and actions made in the interests of owners. This view holds
that managerial decisions and actions are intertwined with multiple
stakeholder interests in such a way that breaking shareholders apart
from non-owner stakeholders is not possible. Managers who, according
to this approach, make decisions in isolation of the multitude of
stakeholders and focus singly on shareholders overlook important
threats to their own well-being as well as opportunities on which they
might capitalize for example, the national association of securities
dealers (NASD) is a self-regulatory organization that monitors and
disciplines members such as insurance companies and brokerages. By
incorporating NASD regulations into their management decisions and
actions, insurance companies and brokerages, at least to some extent,
preempt outside governmental action that may make compliance more
restrictive or cumbersome.
4- Creditor’s perspective:
Creditor will be happy over these policies because the company has
funds ( due to non- payment of dividend, no more borrowing and
passive investments) which may be used and reply the creditors funds
& interest thereon.
The capital markets:
A) new share issues, for example, by companies acquiring a
stock market listing for the first time
B) rights issues
• Loan stock
• Retained earnings
• Bank borrowing
• Government sources
• Business expansion scheme funds
Borrowings from banks are an important source of finance to
companies. Bank tending is still mainly short term, although
medium- term lending is quite common these days.
Short term lending may be in the form of:
a) overdraft, which a company should keep within a limit set
by the bank. Interest is charged ( at a variable rate) on the
amount by which the company is overdrawn from day
today:
b) a short- term loan, for up to three years.
PARTS.
A) Purpose
B) Amount
C) Repayment
D) Term
E) Security
The purpose of the loan A loan request will be refused if the purpose
0f the loan is not acceptable to the bank.
The amount of the loan . The customer must exactly how much he
wants to borrow. The banker must verify, as he is able to do so, that
the amount required to make the proposed vestments has been
estimated correctly.
How will the loan be repaid? Will the customer be able
to obtain sufficient income to make the necessary repayments ?
What would be the duration of the loan? Traditionally, banks have
offered short-term loans and overdrafts, although medium – term
loans are now quite common.
5: Suggestions
The rewards& Benefits of the management could be liked with the
performance shown by the management and to cheek this
performance some internal control measures & auditing practices
should be made by the company’s shareholders. More shares,
power . It may seem an obvious statement but the greater the
shareholding of an individual, the greater are his/jer rights and the
greater is his/her power within the Company. This is so not only
because the larger the shareholding the more likely it so to
represent a controlling interest, But also because the Companies
Act affords greater rights and power to an individual as the size of
his/her shareholding increases. For example, a shareholder owning
5% of a company has the right to have an item placed on the
agenda for discussion at the annual general meeting and, once the
shareholder’s ownership reaches 10% of the company, he/she has
the right to actually call a general meeting of shareholders.
Controlling Interest in the great majority of limited companies, a
shareholding in excess of 50% of the issued share capital will be
enough to control the company, dictate the makeup of the board of
directors and to do most of the acts necessary to run the company
in its everyday business.
SOLUTION Q#2: -
Return of Assets (ROA): This ratio is used in evaluating whether
management has earned a reasonable return with the assets under
its control. IN this computation returns usually is defined as
operating income, since interest expense and income taxes are
determined by factors other than the manner in assets are used.
The return on assets is computed as follows:
Return On Assets = Operating Income
Average Total Assets
ROA is use for management has earned a reasonable return with the
assets under its control, But Roe find by management from the utilization
of the assets. ROA, return usually is defined as operating income,
since interest expenses and income taxes are determined by factors other
than the manner in which assets are used and in ROE return to
stockholders is net income, which represent the return from all sources,
both operating.
Example of ROA:
Lets us now determine the return on assets earned by the management
of computer city in 2006. Operating income, as shown in the income
statement amount to Rs.120.000 Assume that computer city’s asset at
beginning of 2006 totaled Rs.570,000 The balance sheet shows that
assets of Rs.630,000 at year-end. Therefore, the company’s average total
assets during the year amounted to Rs.600,000 (570,000+630,000)/2)
Total Liabilities
=
Shareholders Equity
Calculated as:
Market value per share
=
Earnings per share (EPS)
For example, of a company is currently trading at 43 a share and
earnings over the last 12 months were 1.95 per share, the P/E ratio for
the stock would be 22.05 (43/1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes
it can be taken from the estimates of earnings expected in the next
four quarters (projected or forward P/E). A third variation uses the sum
of the last two actual quarters and the estimates of the next two
quarters.
Also sometimes known as “price multiple” or “earnings multiple”.
These returns can be calculated after the fact, as above, the formula
can be used to calculate the amount that can be invested and still
yield a required rate of return. For example, if a given investment is
expected to earn RS 50 and the required rate of return is 25 percent,
then the amount that cant be invested is RS200. using basic algebra to
rearrange our original formula for calculated rate of return, we obtain
the following formula to calculate investment amount that will yield the
desired rate of return given the expected amount of income:
Answer Q. 2 (c)
Allied Corporation
Incom statement
For the period ended 2008
Sale 100
Less:COGS 68.60
Depreciation 13.60
EBIT 17.80
Interest paid 12.40
Taxable Income 5.45
Tax deduction 1.85
Answer Q. 3 (A)
PV =500
i=12%
n=5%
Fv=Pv (1 + i)n
i. 12% Compounded Semi-Annually for 5 year
Fv = Pv (1 + i %)nx2
n=500 (1.06)10
=500 (1.03)20
iii. 12% Compounded Monthly for 5 Year
Fv - Pv (1 + i %)nx12
=500 (1 – 01)60
Answer Q No. 3b
Pv =25000
i= 10
n=5%
PvA = FvA (Fvi x FA10% x ny )
25000= FvA (Fvi x FA10% x 5y )
25000= FvA (3.791)
FvA =25000/ 3.791
FvA =6595
Answer Q. 3 (c)
Div =3
g=8%
What will the dividend be in 5 Year
Do =3
D1=3(1.08) =3.24
D2=3.24 (1.08)=3.50
D3=3.50 (1.08)=3.78
D4=3.78 (1.08)=4.08
D5=4.08 (1.08)=4.41
Answer No. 4A
i. Expected Rate of Return
Ki Probability Ki x Pn
0.20 0.30 0.06
0.05 0.40 0.02
.12 0.30 0.036
0.116
Ỏ=[sum(Ki-(K/n)xPn)]1/2
Ki K K1 –K (K1 - K)2 Pn (Ki - K) x Pn
.20 .116 0.084 .0071 .30 .00213
.05 .116 -0.066 .0044 .40 .00176
.12 .116 0.004 .000016 .30 .000048
.0038948
Ỏ = 0.0624
Ỏ=
RELATIONSHIP
IF ThenCapital Budgeting :
NPV <0 IRR<Cost of Capital Reject the investment from the
cash flow perspective. Other factors could be important. Provides the
minimum return. Probably reject .
NPV =0 IRR = Cost of capital from the cash flow perspective.
Other factors cold be important.
Screen in for further analysis. Other investments May provide
NPV > 0 IRR> Cost of capital rationed, i.e., go to the most
profitable projects. Others factors could be important.
When we pay that the required return an investment so, say,
10% we usually mean that the investment will have a positive NPV only
if return exceeds 10% another way of interpreting the required return
is to observe that the firm must earn 10% an the investment to
compensate its investor for the use of the capital needed to finance
the project. This is why we could also say that 10% is the cost of
capital associated with the investment imagine that we are evaluating
a risk-free project, in this case how to determine that required return is
obvious, we look at the capital markets and 0bserve the current rate
offered by the risk-free investment and we use this rate to discount the
projects cash flows. Then the cost of capital for a risk-free investment
is the risk free rate. If s project is risky, then assuming that all the
other information is unchanged . the required return is obviously
higher. In other words the cost of capital for this project if it risky, in
greater then the risk-free rate and the appropriate discount rate would
exceed the risk-free rate .
Answer 5(b)
i.
Do = 2
Po = 23
g =7
D1 = D ( 1 + g ) Di = 2.147
= 2(1.07) =
Ke = Dividend1 + g
Po
=2.14 + 7%
23
= 9.3% + 7%
= 16.30%
ii.CAPM
Ke = Rf + B ( Rm – Rf )
= 9% + 1.60 ( 13% - 9% )
= 9% + 1.60 ( 4% )
= 9% + 6.4%
=15.4%