Maximizing Shareholders Wealth
a:
|
Particulars |
Amount |
|
|
Total Fund Desired |
A |
$10,000 |
|
Periodic Payments |
B |
$800 |
|
Interest Rate p.a. |
C |
10% |
|
Nos. of Payments p.a. |
D |
2 |
|
Compound Interest |
E=C/D |
5.00% |
|
Total nos. of Payments |
F=NPER(E,B,0,(-A)) |
9.95 |
|
Nos. of Full Payments |
G=F-0.95 |
9 |
|
Size of Concluding Payment |
H=Bx(F-G) |
$760 |
b:
|
Particulars |
Amount |
|
|
Total Value of Lottery |
A |
$200,000 |
|
Initial Withdraw |
B |
$20,000 |
|
Investment Value |
C=A-B |
$180,000 |
|
Rate of Interest p.a. |
D |
10% |
|
Deferred Period (in years) |
E |
4 |
|
Future Investment Value after 4 years |
F=Cx(1+D)^E |
$263,538 |
|
Monthly Rate of Interest |
G=D/12 |
0.83% |
|
Nos. of Monthly Payments |
H |
180 |
|
Size of Equal Payments |
I=(GxF)/[1-(1+G)^-H] |
$2,832 |
|
Particulars |
Amount |
|
|
Annual Deposit |
A |
$4,000 |
|
Interest Rate p.a. |
B |
5% |
|
Nos. of Deposits |
C |
11 |
|
Total Deposit Amount in 2017 |
D=(1+B)xA[{(1+B)^C-1}/B] |
$59,669 |
It is better to not to sale the right now, as it would cause loss, which is shown in the following table:
|
Particulars |
Amount |
|
|
Annual Payment |
A |
$20,000 |
|
Interest Rate p.a. |
B |
6% |
|
Nos. of Deposits |
C |
10 |
|
Present Value of the Total Payments |
D=(1+B)xA[{1-(1+B)^-C}/B] |
$156,034 |
|
Current Sale Price of Future Rights |
E |
$150,000 |
|
Loss on Sales |
F=E-D |
($6,034) |
|
Period |
Growth in Annual Payments |
Annual Annuity |
Discount Rate |
Discounted Annuity |
|
A |
B |
C |
D |
E=C/((1+D)^A) |
|
1 |
0% |
$1,000 |
12% |
$893 |
|
2 |
10% |
$1,100 |
12% |
$877 |
|
3 |
10% |
$1,210 |
12% |
$861 |
|
4 |
10% |
$1,331 |
12% |
$846 |
|
5 |
10% |
$1,464 |
12% |
$831 |
|
6 |
10% |
$1,611 |
12% |
$816 |
|
7 |
10% |
$1,772 |
12% |
$801 |
|
8 |
10% |
$1,949 |
12% |
$787 |
|
9 |
10% |
$2,144 |
12% |
$773 |
|
10 |
10% |
$2,358 |
12% |
$759 |
|
Cost of Annuity |
$8,244 |
1:
The concept of maximization of shareholders wealth is that it focuses on enhancing the overall value of business instead of focusing on short-terms benefits or returns. On other hand, concept of maximization of profit is essentially a short-term approach that does not lead to increased value of business. The main objective of maximizing the wealth of shareholders is that it results in efficiently allocating capital and maximizing the return on capital. The concept is related with increasing the shareholders wealth by increasing the business value (Bae et al., 2014).
Maximizing the wealth of shareholders is one of the universally accepted objectives of any organization. The concept of maximizing the wealth of shareholders came into being after the concept of profit maximization. Value of shareholders would improve with the increase in price of shares that is regarded as the net worth business function. The drawbacks of maximization of profit model are obviated by the employment of model of wealth maximization. Capital investments made by organization should be able to generate return that is more than the required rates of return such investments made such that this would lead to maximizing the wealth of shareholders. However, an increase in profit of organization indirectly increases the wealth of shareholders. This is so because this would generate higher dividend payment to shareholders that would involve long-term pay offs to customers.
Maximization of wealth of shareholders is the responsibility of management by allocating resources in way that would help in generating highest returns and at the same time mitigating the risks. A detailed and in depth analysis if cash flow associated with investments is required to be conducted by management.
Risk averse investors are one when they are face with two investment decisions, they would prefer the investments with lower risks. Their portfolio comprise of assets that does not carry any risks and generates a fixed income. Such types of investors prefer making investments in government bonds, treasury bills, fixed deposits and certificate of deposits that generates lower rate of return. However, they often lose out on higher return by not making investments in capital assets that has the opportunity of providing investors with higher return. They often lag behind investing in right investment vehicle and are not able to participate in the market (Deguest et al., 2013).
Making an investment in lower return and risk free assets deprive them of advantage that is generated from growth of market and higher level of profits. The establishment of relationship volatility and high level of profits is difficult for such investors. Making investments in risky assets would provide long-term benefits to investor seeking investment in such assets. Expected returns for investors are lower for investors who are willing to take additional risks on their investments. There always exists trade off between risk and returns generated by investments. Investment with lower risk generates lower return and investments with higher risks generate higher returns. Apprehension of investors investing in risky assets is mainly because of the fall in stock value in market. Tax advantage is the main benefits of making investment in capital market assets (Harlow & Brown, 2016).
It is essential for corporate managers to make optimum allocation between risky assets and risk free assets. Some additional costs are involved in making investments in long-term assets and strategies that should be adopted by organization is incorporating the level of tolerable risks and generates desirable level of returns. However, it can be said that investments in risky asset leads to increased business risks and therefore, corporate managers should not always undertake investments in risk free assets.
i:
|
CBA |
Rio Tinto |
All Ordinary Index |
||||
|
Date |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
|
1/31/2016 |
59.99 |
40.28 |
4947.90 |
|||
|
2/29/2016 |
66.61 |
11.04% |
42.69 |
5.98% |
5151.80 |
4.12% |
|
3/31/2016 |
65.70 |
-1.37% |
51.55 |
20.75% |
5316.00 |
3.19% |
|
4/30/2016 |
68.84 |
4.79% |
44.69 |
-13.31% |
5447.80 |
2.48% |
|
5/31/2016 |
66.12 |
-3.95% |
45.50 |
1.81% |
5310.40 |
-2.52% |
|
6/30/2016 |
68.77 |
4.01% |
49.56 |
8.92% |
5644.00 |
6.28% |
|
7/31/2016 |
63.85 |
-7.16% |
47.60 |
-3.95% |
5529.40 |
-2.03% |
|
8/31/2016 |
67.17 |
5.21% |
51.61 |
8.42% |
5525.20 |
-0.08% |
|
9/30/2016 |
68.09 |
1.37% |
54.18 |
4.98% |
5402.40 |
-2.22% |
|
10/31/2016 |
72.97 |
7.17% |
57.75 |
6.59% |
5502.40 |
1.85% |
|
11/30/2016 |
76.46 |
4.78% |
59.90 |
3.72% |
5719.10 |
3.94% |
|
12/31/2016 |
75.77 |
-0.91% |
66.68 |
11.32% |
5675.00 |
-0.77% |
|
CBA |
Rio Tinto |
All Ordinary Index |
||||
|
Date |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
|
1/31/2016 |
59.99 |
40.28 |
4947.90 |
|||
|
2/29/2016 |
66.61 |
11.04% |
42.69 |
5.98% |
5151.80 |
4.12% |
|
3/31/2016 |
65.70 |
-1.37% |
51.55 |
20.75% |
5316.00 |
3.19% |
|
4/30/2016 |
68.84 |
4.79% |
44.69 |
-13.31% |
5447.80 |
2.48% |
|
5/31/2016 |
66.12 |
-3.95% |
45.50 |
1.81% |
5310.40 |
-2.52% |
|
6/30/2016 |
68.77 |
4.01% |
49.56 |
8.92% |
5644.00 |
6.28% |
|
7/31/2016 |
63.85 |
-7.16% |
47.60 |
-3.95% |
5529.40 |
-2.03% |
|
8/31/2016 |
67.17 |
5.21% |
51.61 |
8.42% |
5525.20 |
-0.08% |
|
9/30/2016 |
68.09 |
1.37% |
54.18 |
4.98% |
5402.40 |
-2.22% |
|
10/31/2016 |
72.97 |
7.17% |
57.75 |
6.59% |
5502.40 |
1.85% |
|
11/30/2016 |
76.46 |
4.78% |
59.90 |
3.72% |
5719.10 |
3.94% |
|
12/31/2016 |
75.77 |
-0.91% |
66.68 |
11.32% |
5675.00 |
-0.77% |
|
Average Monthly Holding Period Return |
2.27% |
5.02% |
1.29% |
|
CBA |
Rio Tinto |
All Ordinary Index |
||||
|
Date |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
|
1/31/2016 |
59.99 |
40.28 |
4947.90 |
|||
|
2/29/2016 |
66.61 |
11.04% |
42.69 |
5.98% |
5151.80 |
4.12% |
|
3/31/2016 |
65.70 |
-1.37% |
51.55 |
20.75% |
5316.00 |
3.19% |
|
4/30/2016 |
68.84 |
4.79% |
44.69 |
-13.31% |
5447.80 |
2.48% |
|
5/31/2016 |
66.12 |
-3.95% |
45.50 |
1.81% |
5310.40 |
-2.52% |
|
6/30/2016 |
68.77 |
4.01% |
49.56 |
8.92% |
5644.00 |
6.28% |
|
7/31/2016 |
63.85 |
-7.16% |
47.60 |
-3.95% |
5529.40 |
-2.03% |
|
8/31/2016 |
67.17 |
5.21% |
51.61 |
8.42% |
5525.20 |
-0.08% |
|
9/30/2016 |
68.09 |
1.37% |
54.18 |
4.98% |
5402.40 |
-2.22% |
|
10/31/2016 |
72.97 |
7.17% |
57.75 |
6.59% |
5502.40 |
1.85% |
|
11/30/2016 |
76.46 |
4.78% |
59.90 |
3.72% |
5719.10 |
3.94% |
|
12/31/2016 |
75.77 |
-0.91% |
66.68 |
11.32% |
5675.00 |
-0.77% |
|
Annual Holding Period Return |
1.96% |
4.29% |
1.15% |
|
CBA |
Rio Tinto |
All Ordinary Index |
||||
|
Date |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
|
1/31/2016 |
59.99 |
40.28 |
4947.90 |
|||
|
2/29/2016 |
66.61 |
11.04% |
42.69 |
5.98% |
5151.80 |
4.12% |
|
3/31/2016 |
65.70 |
-1.37% |
51.55 |
20.75% |
5316.00 |
3.19% |
|
4/30/2016 |
68.84 |
4.79% |
44.69 |
-13.31% |
5447.80 |
2.48% |
|
5/31/2016 |
66.12 |
-3.95% |
45.50 |
1.81% |
5310.40 |
-2.52% |
|
6/30/2016 |
68.77 |
4.01% |
49.56 |
8.92% |
5644.00 |
6.28% |
|
7/31/2016 |
63.85 |
-7.16% |
47.60 |
-3.95% |
5529.40 |
-2.03% |
|
8/31/2016 |
67.17 |
5.21% |
51.61 |
8.42% |
5525.20 |
-0.08% |
|
9/30/2016 |
68.09 |
1.37% |
54.18 |
4.98% |
5402.40 |
-2.22% |
|
10/31/2016 |
72.97 |
7.17% |
57.75 |
6.59% |
5502.40 |
1.85% |
|
11/30/2016 |
76.46 |
4.78% |
59.90 |
3.72% |
5719.10 |
3.94% |
|
12/31/2016 |
75.77 |
-0.91% |
66.68 |
11.32% |
5675.00 |
-0.77% |
|
Standard Deviation |
5.26% |
8.64% |
2.99% |
|
CBA |
Rio Tinto |
|||
|
Date |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
|
Long Term Market Return |
7% |
7% |
||
|
Risk Free Rate |
3.25% |
3.25% |
||
|
Beta |
1.1 |
0.95 |
||
|
Expected Returns |
7.38% |
6.81% |
|
CBA |
Rio Tinto |
|||
|
Date |
Stock Price |
Holding Period Return |
Stock Price |
Holding Period Return |
|
Beta |
1.1 |
0.95 |
||
|
Expected Returns |
7.38% |
6.81% |
||
|
Weightage |
60% |
40% |
||
|
Portfolio Return |
7.15% |
|||
|
Portfolio Beta |
1.04 |
The portfolio would provide higher return than Rio Tinto and would be less volatile than CBA. Hence, the investors should select the portfolio for investment purpose.
References:
Bae, G. I., Kim, W. C., & Mulvey, J. M. (2014). Dynamic asset allocation for varied financial markets under regime switching framework. European Journal of Operational Research, 234(2), 450-458.
Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education
DeFusco, R. A., McLeavey, D. W., Anson, M. J., Pinto, J. E., & Runkle, D. E. (2015). Quantitative investment analysis. John Wiley & Sons
Deguest, R., Martellini, L., & Meucci, A. (2013). Risk parity and beyond-from asset allocation to risk allocation decisions.
Harlow, W. V., & Brown, K. C. (2016). Market Risk, Mortality Risk, and Sustainable Retirement Asset Allocation: A Downside Risk Perspective. Journal of Investment Management, 14(2), 5-32.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
