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BUACC5936 Financial Management Assignment
From the execution of this program over financial management an understanding will be developed regarding the different concepts related to the financial management of a company. Merger and acquisition and takeovers are the trending concepts which are gaining importance in the current scenario so as to expand the area of operations of the business as well as to enhance the performance of the business by combining with the other companies or by controlling other companies. It will discuss the concept of Capital asset pricing model and Arbitrage pricing theory and the three forms of market efficiency and also explains the patterns in the equity returns and the effects seen in Australian market.
Q1.i) what factors determine the expected return of a portfolio?
Expected return of a portfolio can be explained as the weighted average of the expected return of the assets of the individual. There are various factors which help in the determination of the expected return of a portfolio and these factors are mentioned below:
1. The performance in the market of the different assets of the portfolio determines the expected return of a portfolio.
2. The duration of time involved (Ceria, et. al., 2012).
3. The economic and market conditions of the financial markets.
4. The economic activities or operations carried out in the markets of the different economies.
5. The proportion of the asset in the portfolio is also an important factor which helps in the determination of the expected return of a portfolio (Ismal, 2014).
Q1.ii) Distinguish between selection and allocation in the context of portfolio management
Portfolio management is a crucial aspect which describes a manner that enables the decision making related to the investment mix and the policies, ensuring the matching of the investments with the objectives, allocation of the assets for the individuals and the different entities and creating a balance for maintaining the performance and minimising the risks. The main motive behind using the portfolio management is to reduce the risk to the possible extend so as to enhance the chances of profitability and increasing the chances of returns over the investments (Heppell, 2014). Selection and allocation process plays an important role in the portfolio management and the differences between both are discussed below:
Selection process of portfolio management
Allocation process of portfolio management
Selection process of the portfolio management can be explained as the process which identifies the assets which need to be included in the portfolio of an entity.
Allocation process of the portfolio management can be explained as the process where the requirement of the assets in the portfolio is analysed so as to allocate the assets on the basis of the requirement.
This is the first step and takes place before the allocation process as the assets are first selected and then allocated on the basis of the requirement of the portfolio of the individual or entity (Klingebiel & Rammer, 2014).
It is the next step as it takes place after the selection of the asset for the portfolio of the individual or of the entity (Low, et. al., 2013).
QB1) Compare and contrast the notions of weak-form, semi-strong-form and strong-form market efficiency.
There are three forms of market efficiency and these forms are weak-form which explains that the prices are shown in historical data, semi-strong which explains that the prices shows the entire public information and strong-form which explains that the prices shows the entire private as well as public information (Rompotis, 2011). Comparison between these three forms of market efficiency is as follows:
Weak form market efficiency
Semi-string form market efficiency
Strong form market efficiency
This form of market efficiency presents the past data of the prices of the stock.
In this form of market efficiency measurement is done of the public information of the stock.
In this form of market efficiency measurement is done of the private information of the stock (Nwachukwu & Shitta, 2015).
QB2) critically examine the following concepts:
a) Capital Asset Pricing Model
Capital asset pricing model is a measure which provides an explanation of the relationship between the risk associated with the asset and the expected rate of return over the asset. It helps in the decision making process regarding the addition to the assets. This model considers the systematic risks which helps in the reflection of the reality and helps in the calculation of the cost of equity. Various assumptions are made in this model which includes perfect capital market and the borrowing is done by the investors at the risk free rate of return (Cai, et. al., 2015).
b) Arbitrage Pricing Theory
Arbitrage Pricing Theory is explained as the general theory of asset pricing which states that an estimate of the returns of an asset can be made or predicted with the help of the relationship between the various common risk factors and the assets. This theory of asset pricing is known for the most effective method used for the purpose of estimation of the price of an asset of an individual or of an entity. It helps in the analysis of the potential risk involved in the price of the stock (Iqbal, et. al., 2012).
QB3) you are asked to read the following journal article and answer questions QB3.a and QB3.b) below:
a) Explain the patterns (effects) in equity returns?
Different patterns or effects in equity return are there and these include the effect of the size which has explained that a higher rate of return is earned by a small capitalisation firm on an average basis, the effect of weekend which the average rate of returns on Mondays is less in comparison to the weekends due to the release of the negative news about the companies on Fridays when the market gets closed, the effect of value which states that it is expected that the stock will perform better in the long run for gaining advantage in the long run, effect of the turn of year which states that in the initial two weeks of January company generates abnormal rate of returns and the momentum effect which states that the prices will fall as these prices rises in the past (Volkman, et. al., 2014).
b) According to the above study, what effects can be seen in the Australian market? Explain. You are asked to use similar articles for more information.
The return of stocks in Australian market shows different effects in different situations or conditions. These different situations show different patterns on the return of the stocks in Australian market. These different conditions include the effect of the turn of year, effect of the size, value effect, effect of momentum and weekend effect. Momentum effects is an effective strategy which has helped in focusing over the results of the past of the stocks so as to analyse the trends in the return of the stocks in the past which will help in identification of the return in the future period. The value effect has helped in the analysis of the returns over the long period of time in the Australian market. The weekend effect has helped in analysing the conditions of the Australian market and the return of stocks which shows the image of the company in the market. It helps in the analysis of the return of the stock on the weekdays and the weekends. In the Australian market it is seen that the pressure of selling is high at the end of the year which results in decrease in the prices of the stock in the market and the prices of the stock start rising in the starting of the year when the stocks of the company are purchased again. From the analysis of the Australian market it is seen that the smaller companies are earning normal or low profits in the starting months and the large companies are earning positive profits in the starting months of the year.
The size of the company affects the return of the stock but in the Australian market it is seen that the smaller firms or the smaller companies are earning higher profits in comparison to the larger companies. All these aspects have helped in the evaluation of the market conditions of the Australia so as to evaluate the conditions in a better manner. The impacts of these effects can be seen over the market or over the economy of the different countries of the world. The study of these effects has helped in the development of the knowledge of the different effects and the manner in which they helps in predicting the returns over the stock of the different businesses. There is a relationship between the size of the company and the market condition of the Australia as it helps in the analysis of the performance of the different companies which differs from each other in different ways. The impact of the size of the company can be seen in the different cases of the Australian market. It is analysed that the impact of weekend effect is getting reduced over the companies of Australia (Ndwiga & Muriu, 2016).
QC.1.a. Explain the motives behind mergers and takeovers.
Mergers and takeovers are undertaken so as to expand the area of operation as well as enlarging the availability of the resources available with the business by combining with other businesses or taking control of the other businesses. Merger can be understood as the process of combining two or more companies into one for better functioning and takeover can be understood as the process when a company purchases other company’s business. The motives behind mergers and takeovers can be divided into three different categories. These categories are mentioned below:
Financial motives: mergers and takeovers are focused over the utilisation of the financial resources of the organisation in an effective manner in the favour of the shareholders of the business and to enhance the financial performance of the business for better execution of the operations of the business.
Strategic motives: merger and takeovers enables the business to develop and improve the performance of the business by focusing over the effectiveness of the business in executing its operations and closely linking with the competitive advantage by helping the business in coping with the increasing competition in a better manner. Mergers and takeovers provide better chances for expansion of the business and improvement in the capabilities of the business (Bekkum, et. al., 2011).
Managerial motives: managerial motives behind merger and turnover enhancing the reputation of the business and establishes link between the efforts and the growth.
QC.1.b. Consider the following two quotations.
QC.1.b.1 First quotation
Companies go for takeovers due to various reasons as takeovers benefits to the business at large level. The main reasons for takeovers include expansion of the area of operation of the business, utilisation of the resources available with the business in a better and effective manner, for dealing with the changing technology, restructuring the business and its operational framework and to provide benefits to the stakeholders of the business. Different factors have contributed towards the increase in the level of competition in the market due to entry of the foreign businesses in the market. The focus of the market for corporate control is over the maintenance of the discipline among the managers to act in the favour of the stakeholders of the business. Takeovers enable the company to deal with the increasing level of the competition which exists in the different markets including labour market, product market and capital market. An additional source is provided for the management of discipline for the managers of the companies. For the purpose of generating an understanding of the market for corporate control there is a need to develop understanding of the economies of the public corporation. Companies need to look after the benefit of the stakeholders who have interest in the operations of the company (Rowoldt & Starke, 2016). There is no need to involve hostile takeovers in the market for corporate control. Hostile takeover can be understood as the purchase or acquisition of one company by the other by directly to the shareholders so as to ask and propose to change the management of the company by the approval of the shareholders of the company. The companies which are suffering from poor financial conditions open their gates for takeovers on friendly basis so as to enhance the performance of the organisation and to provide benefit to the shareholders or the stakeholders of the company. In these cases the companies suggest or ask to the shareholders to cast their votes in the favour of the other company so that takeover can take place easily. Every market requires funds for their functioning so as to operate in the market. Corporate takeovers provide gains or benefits to the different stakeholders including the shareholders, bidders, employees and other stakeholders. The controversial issue faced in the market for corporate control is of the poison pills. Companies use this tool for the purpose of preventing the occurrence of the hostile takeovers. Poison pills present the bidding company in an unattractive company to the bidder so as to safeguard it from hostile takeover. This strategy is an effective measure for the purpose of discouraging the hostile takeover in the market. The other controversies in the market for corporate control include the focus of the manager and the management of the public company over the short term prices of the shares of the company at the place of the long term prices of the shares. The managers are unable to remove the strategies which do not contribute towards the attainment of the objectives of the organisation which are growth and survival. The need of takeover arises in a company due to variety of reasons. For the purpose of restructuring of the corporate assets of the company takeovers are undertaken which increases the efficiency of the companies and competitiveness of the companies so as to overcome the issues faced by the companies. These takeovers results in higher turnovers of the companies and helps the bidder company to take loans over the assets of the bidding company. Takeovers creates impact over the outputs and inputs of the bidder company, increases the investment efficiency of the company, helps in exploring the heterogeneity, act as a source for gaining efficiency and check over the performance of the company and position of the company in the market (Rowoldt & Starke, 2016).
QC.1.b.2 second quotation
With the increase in the cases of merger and acquisition there is an increase in the trend that both the bidding and the bidder company have a common director which makes the process of takeover easy. The bidder company offers a position of director of the bidding company in the bidder company which benefits the bidder company by analysing the actual cost for the bid so as to eliminate the risk of expensive takeover mistakes. This form of merger and acquisition helps the bidders by facilitating the transmission of information among the companies. The process of merger and acquisition is an important process which includes various stages or steps which focuses over the execution of the effective merger and acquisition. The main aim of the bidder company is to minimise the time involved in the process of merger and acquisition so as to shorten the negotiation duration involved in the process of merger and acquisition which will enable the bidder company to reduce the risk of increase cost and uncertainties in the process. The relationship between the bidder and bidding companies also creates huge impact over the negotiation duration included in the merger and acquisition process. There is a need to establish proper relations so as to solve the problem of information asymmetry and to reach out at the end of the negotiation process (Rowoldt & Starke, 2016). A strong hold need to be maintained over the negotiation process so as to gain a strong potential for gathering information. The most important element in the process of negotiation is the payment mode. There are different ways or methods or modes available to make payments for the merger and acquisition of a company. These ways include payment for the merger and acquisition in cash, in the form of equity shares or partly in cash and equity shares. The mode of method or payment is determined by the wish of the bidder company to dilute the voting power to the bidding company by providing equity shares to them in the bidder company. The higher the power in the hands of the bidding company will results in less interest of the bidder company to make payment for the merger and acquisition in the form of equity shares. The bidder company need to possess knowledge of the bidding company so as to take an effective decision which will provide benefit to the bidder company and help in taking decisions regarding the payment modes, negotiation duration and other elements involved in the process of merger and acquisition. The networks of the director increase the chances of merger and acquisition. There are two forms of connections or two ways for connection between the bidding and Bidder Company and these include direct and indirect connections. It is analysed the better the connections are between the bidding and bidder companies’ results in the chances of merger and acquisition. It is expected that the chances of merger and acquisition are higher when the director of the target and bidding companies are same. Proper analysis of the information of the target company need to be done by the bidder company so as to evaluate the value of the target company so as to execute the merger and acquisition process in an effective and efficient manner. The lack of knowledge of the target company will lead to or will result in loss to the bidder company. The performance of the merger and acquisition is measures by establishing the link between both the companies. When the payment is made in the form of cash for the whole merger and acquisition process then it results in generating more positive market reactions for the merger and acquisition process. This report has helped in the analysis that the connections between the bidder and bidding company provides fast execution of the negotiation process for the duration of the merger and acquisition among the target and bidder company (Rowoldt & Starke, 2016).
QC1.c: Do takeovers increase the value of the target, or the Bidder Company, and/or aggregate market value?
The takeover creates impact over the value of the target as well as of the bidder company. Takeovers help in generation of the higher returns to the stockholders of the target company as well as to the bidder company as the reputation or the brand value of the companies will increase due to the takeover. Takeover will result in the increase in the financial capability of the target company by gaining the support of the bidder company and the bidder company will gain the resources available with the bidder company which will improve the image of the company in the market and promote the companies in the market. This creation of reputation in the market will create an impact over the aggregate market value of the companies and increases the market value on aggregate basis (Raman, et. al., 2013).
This program has helped in the generation of the knowledge of the different aspects related to the financial management of a company in different cases. This program discussed the factors which are responsible for the expected return to a portfolio and difference between the selection and allocation in relation to the portfolio management. Comparison has been made over the differences between the three forms of market efficiency. It has developed an understanding of the concepts of merger and acquisition and takeovers which occurs between the companies due to the different reasons.
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