INVESTMENT AND PORTFOLIO MANAGEMENT SAMPLE

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INVESTMENT AND PORTFOLIO MANAGEMENT SAMPLE

Question 1

Particulars Bond A Bond B
Par value of the bond 1000 1000
Coupon 8% for Bond A, 7% for Bond B 80 70
Maturity Number of years 12 13
Yield/ Interest rate 7% 8%
The price of the bond is calculated using the formula given below    
Bond price 1094.10 942.82

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i)  
Shareholders’ equity
Particular RM
par value 1 common stock RM40,000,000 4000
Premium or additional paid-in-capital RM25,000,000 2500
Retained earnings RM20,000,000 2000
Total shareholder equity 8500

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ii)  
Outstanding of shares
Issued common stock 4000
Treasury stock 2000
The formula is to find outstanding shares issued common stock-treasury stock 2000

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Calculation:    
  debit credit
cash 0  
retained earning 2000  
Treasury stock   2000

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Stock dividend is the type of dividend that consists of extra shares of stocks. Moreover, it is the payments that are made to the shareholders are made within the shares rather than considering the cash (Sondakh, 2019). However, the stock dividend has different advantages to reward the shareholders of the company without decreasing the cash balance of the company although the cash can be easily diluted in terms of earnings per share. The company issues the stock dividend for the following reasons:

  • To maximize the amount of outstanding stock shares.
  • To decrease the market price per stock price.
  • To transfer the written earnings of the company into paid-in capital.
  • Reduce the cash distribution of the company to its stockholders.

The reason for declaring stock dividends companies is due to the limited supply of “liquid cash reserves”. The company may also declare a stock dividend if they are trying to conserve the existing cash supply. The issue of stock dividends significantly dilutes the outstanding share value due to the increase in total stock supply (Purwanti, 2020). On the other hand, if the shares are being raised in terms of prices then it could be advantageous for the shareholders, and desktop dividends are not considered to be under taxation until these are sold, unlike the cash dividend.

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d.

Question 2

a.

Preferred stocks are considered as the hybrid security type that consists of properties of both the common bonds and stocks. The various advantages of preferred stocks are explained below:

  1. The main benefit of preferred stock is that it tends to pay a higher and regular dividend as compared to the similar common stock of the company.
  2. The company is not constrained for the payment of the dividend which is not considered to be the default if the company misses the preferred payment of the dividend as it might miss the bond dividend (Gacus & Hinlo, 2018). The company is also constrained to pay the missed preferred payment of dividends before the company makes any of the dividend payments on the common stocks.
  3. Preferred stocks are a type of fixed income as the number of dividend payments or regular interest is considered to be a known factor.
  4. The market price of the preferred stocks is greatly influenced by the movement within the prevailing rate of interest.
  5. The company’s bondholders have the right to the asset before the right of the preferred stockholders. If the bondholders have created the entire thing then the Asset of the company is available to the preferred stockholders of the company.

Current Developments in Accounting Thought

Common stocks are securities that represent the ownership of an individual in a company and claim the root profits of the venture capital. Usually in the term common stocks are considered to generate returns at a higher rate and the stockholders are further compensated with a maximum amount of dividend income (Speranda, 2022). The common stops are issued as an alternative option to sell the preferred stock or debt bonds. However, the basic reason behind the issue of common stocks is to raise capital. In case of creditors, bankruptcy, bobondholdersnd preference shareholders these are likely to gain their shares before investing in the common stock of the company. Moreover, they are likely to receive some of the remaining assets after the payment of all the outstanding accordingly. The various features of the common stock have been discussed below.

  1. Stock rights: Common stock is offering a particular right to the shareholders. Despite the individuals who are investing in the shares are commonly entitled to the following rights:
  • Dividend Right: mainly entitled to earning dividends.
  • Assets right: mainly entitled to the receiving of remaining assets within the liquidation event.
  • Voting rights: have the power of electing the board of directors.
  • Pre-emptive rights: mainly entitled to receiving the consideration.
  1. Returns: Common stocks enable the investors to create earnings in different ways such as in the form of dividend income and capital gain. However, investors are earning a higher amount of capital gain when the stock valuation of the company is increasing. Similarly, in case the company is left out with some of the substantial revenue after the payment of their maintenance charges and additional expenses then they might declare the dividend for their investors.
  2. Investment option: Individuals can further invest in the common stocks in different ways such as through the process of a direct stock plan, through the plan of dividend, reinvestment through the process of the stock exchange, and by investing in mutual funds.

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Some of the salient features of bonds commonly include interest face value, interest rate, maturity issues, and tax status. Different types of risk are associated with the bonds including default risk, prepayment risk, and rate of interest risk (Saeed et al. 2021). Most of the bones come with ratings that illustrate the grade of investment. Some of the basic characteristics of bonds are illustrated below.

  • Face value: Corporate bonds normally have a power value of $1000 but the amount can be higher for government bonds.
  • Interest: Most of the bonds pay the interest after every 6 months but it can be possible to pay during the period “monthly, quarterly, or annually”.
  • Interest rate: Bonds with fixed rates generate a consistent rate of interest by receiving a similar amount every year or month which is dependent on the payment of interest at a proper schedule.
  • Maturity: Maturities are reaching from one day to as long as 30 years. A bond that matures in a year is more predictable and less risky than a bond that matures after 20 years. Therefore, it can be stated that the longer the maturity time the higher the interest rate.

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d.

Shareholders equity Before the stock dividend Stock dividend effect 20% After the stock dividend
par 1 Common stock 3000 600 3600
Additional paid-in-capital 2000   2000
retained earnings 5000 -600 4400
Total shareholders equity 10000 0 10000

Qualitative and Quantitative Methods

Question 3

a.

i)

Formula of Sharpe measure= expected return-standard deviation/risk-free rate Fund A 0.02
  Fund B -0.525
  Fund C -0.1425

ii)

Treynor measure
Formula= average portfolio return- average risk-free rate/portfolio beta 0.10

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b.

The portfolio in the group is selected for the achievement of the highest level of return in the given risk level. The Sharpe and the Treynor ratio indicate the standard deviation and risk-free rate of the funds A, B, and C. This is ranked with a positive evaluation that is gained from the above calculation.

Question 4

  1. i) Developed Countries:
  • The impact of financial globalization helping developed countries better manage their funds and volatility of consumption. Indeed, various theories imply the volatility of consumption in terms of funds that must be reduced as a level of increasing financial integration.
  • The essence of diversification in terms of Global Finance in developed countries is to shift their income risk to the world market. Since most of the developed countries specialize in the fund management and factor structure of endowment, they can also acquire larger games to the consumption of international risk sharing.
  • The potential benefit is specifically relevant by the understanding despite the quality of the fund which is experienced by the developed countries that have undergone the financial integration that have protected from the consumption volatility.
  • At a low level of financial integration, there has been an increment in the degree of financial integration which is linked with the increase of relative consumption volatility.

Descriptive paragraph

  1. ii) Emerging market:
  • The return on the portfolio of the investor investing in the stocks is gradually affected by the market performance. Adding exposure to those funds increases the geographical diversification within the investor portfolio and allows them to earn through the market cycle.
  • Emerging funds of the market are for investors who can adjust with a higher tolerance of risk and look forward to “portfolio diversification” from the investment beyond various emerging markets.
  • Refund managers also can invest the money of the investor in the appropriate place with the help of appropriate data, experience in investment, and technical expertise in the overseas market.

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References

Gacus, R. B., & Hinlo, J. E. (2018). The Reliability of Constant Growth Dividend Discount Model (DDM) in Valuation of Philippine Common Stocks. International Journal of Economics & Management Sciences, 7(1), 2018. https://www.researchgate.net/profile/Roy-Gacus/publication/324033146_The_Reliability_of_Constant_Growth_Dividend_Discount_Model_DDM_in_Valuation_of_Philippine_Common_Stocks/links/621e03ca579f1c041723686e/The-Reliability-of-Constant-Growth-Dividend-Discount-Model-DDM-in-Valuation-of-Philippine-Common-Stocks.pdf

Purwanti, T. (2020). The effect of profitability, capital structure, company size, and dividend policy on company value on the Indonesia stock exchange. International Journal of Sociology, 060-066. https://www.seocologi.com/index.php/seocology/article/download/9/8

Saeed, M., Elnahass, M., Izzeldin, M., & Tsionas, M. (2021). The yield spread determinants of sukuk and conventional bonds. Economic Modelling, 105, 105664. https://eprints.ncl.ac.uk/file_store/production/253638/A7D5CA62-6FE4-4112-88A7-A2C8F02F4130.pdf

Sondakh, R. (2019). The effect of dividend policy, liquidity, profitability, and firm size on firm value in financial service sector industries listed in the Indonesia stock exchange 2015-2018 period. Accountability, 8(2), 91-101. https://ejournal.unsrat.ac.id/index.php/accountability/article/download/24760/24471

Speranda, I. (2022). DETERMINING THE RIGHT VALUE OF A STOCK–A NEW PERSPECTIVE ON VALUATING COMMON STOCKS. Economic and Social Development: Book of Proceedings, 11-19. https://www.researchgate.net/profile/Venelin-Terziev/publication/360112360_Spiritual_leaders_of_the_Bulgarian_nation/links/6262c0c9ee24725b3ebde76d/Spiritual-leaders-of-the-Bulgarian-nation.pdf#page=19

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