Preference and Ordinary Shares - Assignment Example

Introduction to Finance Assessment Student Name Course Date Question 1 Preference shares Ordinary Shares Shareholders have a direct level of preferential right in relation to the entitlement to receive dividends and also, a set of repayment of their invested capital in the case where the company is liquidated The shareholders of ordinary shares are directly entitled to dividends and a residual level of economic value in the event that the company is liquidated. This residual economic value would and dividends would be enjoyed after bondholders and preference shareholders are fully paid. The shareholders of preference shares enjoy a fixed rate of dividends each and every operational year Ordinary shareholders enjoy dividends that can be higher than the level of preference shareholder dividends given that dividends for ordinary shares are never fixed in any given case. The shareholders of preference shares do not enjoy any voting rights and in the case of non-payment of dividends, they may have accumulative dividends that would be paid prior to any form of payment of common shares is paid. Ordinary shareholders enjoy the imminent right to vote at annual general meeting while still have the capacity to elect Board of Directors of a given company. Dividends that are paid as a result of holding preference shares could be allowed a preferential tax treatment Ordinary shareholders do not enjoy any form of tax treatment Question 2 In financial terms, risk is a form of uncertainty that faces the possibility of either gaining or losing something considered to be of substantial value. To successfully define risk, there should be the existence of three fundamental elements; first, there should be the probability of a loss. This means that in the event there is the presence of risk, it is more likely that there would be occurrence of loss. Secondly, there should be the measurement of the probability of the aforementioned loss. This ascertains that when risks exists, the possibility of loss occurring should be measured effectively. Consequently, it should portray a probability of financial loss. This means that in the event that the risk happened then there was some form of loss to go with it. This loss should be financial in nature and is applicable for measurement purposes. Risks can be differentiated as being pure or speculative in nature. Pure risks ascertain that the circumstances can only result to a loss or no form of loss at all. A perfect example of pure can be well-expounded using the ownership of an asset that is later stolen. The probable results would be a loss or no form of loss at all. Speculative risks mean that the underlying risks could lead to either a loss or gain. A business undergoes a great number of speculative risks. An investment made in the stock of exchange can be lost in the event that prices of shares and decrease; however, it can foster a profit if it gets returns. Question 3 Active management style in investment platforms seeks to surpass the overall performance of the underlying market within a specific period of timeframe. These manage engage in rigorous buying and selling of securities while basing their behaviours on research; potential market forecasts as well as individualised judgement and experiences. It is important to note that in this type of management style; there are frequent activities related to the buying and selling of securities and taking into account of the underlying exorbitant costs incurred as a result of rigorous research exercises, makes these active set of managers more expensive in comparison to the index-passive managers. These managers engage in the review of investments on a regular basis in order to assist with actualising the benefits that are attributed from the movements within the market or from possible growth in individual set of stocks. There are two forms of managers that engage in active management that include; multi-managers and single managers. On the contrary, passive management styles operate under an indexing approach. This means that the manager at hand will only focus on matching performance of the indexes he/she is presently tracking. It is crucial to note that an index is a substantive collection of stock options that could extend to the S&P 500. The management engages in tracking the indexes by way of holding all even close to all of the stock options in the indexes. This provides a wider diversification and lower costs through long-term activities of purchase and holding approach to securities. Passive managers possess a lower level of risk management approaches. A perfect example of an investment manager that adopts an index management or rather passive approach can be seen with Vanguard Investments Australia Ltd (Vanguard). Question 4 The loan-to-value ratio is considered to be a lending risk assessment ration that borrowers adopt for examination purposes prior to approving any potential mortgage. For most cases, the process related to the assessment with a higher loan-to-value ratio is basically perceived to be of a high risk level and thus, in the event that a mortgage is approved, the loan would certainly costs the borrower more to borrow. In addition to this, a loan offered at a high loan-to-value ratio could require that the borrower to engage in buying off mortgage insurance for purposes of offsetting the risk to a lender. For a borrower, the loan-to-value ratio is deemed to be a crucial aspect of mortgage underwriting regardless of whether or not it of meant for purchasing a residential property; refinancing an existing mortgage into a subsequently newer loan or even borrowing against the underlying accumulation of equities within a given property investment. In the case where the loan-to-value is not considered to be a determining facet needed for securing a mortgage or even home equity loan, this ratio plays a significant role in determining the degree of borrowing costs to the borrower. A substantial number of lenders provide mortgage as well as home equity applications with a lower interest rate in the event that the loan-to-value ratio is below 80%. A higher LVR does not necessarily mean that the borrowers would not be able to access mortgage approval; however, the overall costs of the loan would increase in the same degree of the ratio. Question 5 The introduction of compulsory superannuation contributions is fundamentally as a result of people now living longer than expected thereby triggering a great number of aging population. There has also been a substantial degree of decline in the average number of workforce from 7.5 for people aged over 65 in 1970s to a low 2.7 in the near future. This will likely result to a restrain of the tax base hence a compulsory requirement for individuals to fund their own retirement package. The introduction of government-based superannuation guarantee scheme requires employers to contribute 9% of employee’s salary towards superannuation fund in order to prepare them for their retirement these contributions are expected to be made on a quarterly basis to the ATO, which provides administration services to the scheme The objective of the superannuation guarantee scheme has indeed achieved its objectives of ensuring that employers submit compulsory superannuation funds from the salary of its employees. In the event that they fail to do, these employers are subjected to pay a tax that is popularly referred to as the superannuation guarantee charge. This means that the employers would submit these finds to the kitty without fail to aid with assisting their workers manage their retirement efficiently in the future period. The Superannuation Guarantee (Administration) Act 1992 is the current sole legislation that guides employers on how to go about the process and also provides a framework for conducting administrative arrangements for the operation of SG scheme. This act provides a framework for imposing a charge on employers that fail to avail the required degree of superannuation submission for its employees. Question 6 i) It is a solid form of investment; this is because the property is an immovable asset that only appreciates in value over a period of time ii) The nature of returns for properties is made up of both income that is generated from the daily gains made on the market and the capital that was initially employed in the course of making the investment. iii) The property market enjoys a great deal of taxation benefits. Investors are directly likely to benefit from such items as a discount on capital gains made as well as the depreciation allowances made within any given moment in time. There are also tax benefits that are offered to investors in form of both tax-free and tax-deferred income. iv) Property market further enjoys prices that are less volatile hence investors are less likely to lose any of their initial investments v) Property market offers a platform for diversification purposes. This is especially since the property market does not experience cycles like in the case of share markets. vi) Certainly, property is a form of illiquid form of investment, which means that the investor cannot readily liquidate it for cash at any given form without following a specific set of process. It thus goes without saying that it provides a long-term guarantee for investors to reap both returns and capital gains without the fear of their investments being lost. Question 7 i) Property fund avails investors with opportunities in order to ensure there is a diversification of this investment in relation to aspects of locations; sizes and sectors. It is important to understand that the diversification process is usually meant to reduce the level of possible risks that a fund could be exposed to. It ensures that investors are set to gain from a maximum degree of gains while still enjoying great stability levels overtime. ii) Property funds ensure to take care of costs that are associated with aspects of management and sustenance. This means that the investor is highly protected from possible reduction of their returns hence enjoy maximum gains as much as possible for every of the investment made. In fact, it is usually possible that the management fee varies from a mere 0.5% to 1.5% per annum of the overall gross value of the assets of the property funds. iii) Property-related investment is subjected to taxation benefits that relates to unit holders enjoying discount on capital gains and depreciation allowances. Certainly, these tax benefits for the underlying investors in form of tax-free and tax-deferred income levels. However, it is important to note that the overall total of tax deferred aspects are further adopted for the purpose of reducing the cost-base of the property at hand whenever it is put on sale. Question 8 P/E= market value per share/ earnings per share Earnings per share= net income- dividends on preferred stock/ average outstanding shares = (13.8-10)/ (10+7.5/2) = 3.8/8.75 = 0.43 P/E = 21.6/0.43 = 50.23 Analysis; Kid’s Apparel Ltd P/E ratio stands at 50.23, which is above the industry average of 12 times. The price/ earnings ratio is used to ascertain the expected price of a share that is solely based on its earnings. A firm’s whose price/earnings is positioned highly in comparison to another firm or industry average means that it enjoys from a positive future performance while the investors will be more than willing to pay more for its underlying shares. This means that investors are more than willing to pay more than $21.6 that is the current price of Kid’s Apparel Ltd. This higher ratio means that the potential investors of the company are far much anticipating for a higher performance and growth in the near future. This certainly means that the potential and existing investors of the company are holding onto a very positive and strong set of investment when it is compared with the possibility of thinking to invest in other companies within the same industry as a whole. Question 9 Fund assets= (25+28+66+59+135+296+100+112)/2 = 410.5 Financial liabilities= (45+45+167+167)/2= 212 Unit price = financial assets-financial liabilities/ number of units issued = 410.5-212/63 = 3.15 Question 10 (a) Unit price = financial assets-financial liabilities/ no of units issued = 80,000,000-50,000,000/20,000,000 = 30,000,000/20,000,000 = 1.5 10b) Market price at 10% discount of 1.5 = 90/100*1.5 = 1.35 The price is different from the one offered as unit price due to the discounts offered in relation to capital gains and tax-differences currently being offered for A-REIT related funds. Read More