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Decisions that can be prescribed in financial terms are covered in the financial strategy (Bender & Ward, 2012). Thus, it could be stated that the financial decisions are different from business decisions that the company may undertake however, they are related to each other and have implications for them. (iii) There are four reasons that market value might differ from fundamental value which are given below: a. The share price often reflect future prospect of the company’s performance (Bender & Ward, 2012). If the market expects that the financial results of a company will exceed the expected growth rates than the share price will react positively in advance (Bender & Ward, 2012). This is usually reflected by high price to earnings ratio. It is understood that companies’ stock which have higher price to earnings ratio are likely to show increase in the market value of their shares as the market develops an expectation that these companies are likely to outperform their expected targets. For example, a recent launch of iPhone 5 pushed the market value of Apple’s stocks higher. b. ...
ecomes mature and better view of the company’s performance becomes clearer the market value of shares will begin to coincide with the fundamental value of business per share. c. The company announces a future investment project which is expected to yield higher returns for the company and thus, the market reacts positively to the news. Although, the investment is yet to be placed by the positive sentiments about the projections that the company makes for its investment decision can have positive impact up on the market value of the company’s shares. For example, a company Medinah Minerals announced its exploration project in South America which lead to major interest by shareholders in its stocks and the market value went up above the fundamental value of the company. d. If a company approaches to takeover another company then managers or shareholders of the target company may enter in the market to alter the market value of its shares so that higher bid can be achieved. In this case, the market value of shares will be higher than the fundamental value of the company. This is a strategy to prevent takeover bids by other entities. For example, this defense tactic is very much common in the US as compared to the UK. Q2: (i) Year 0 1 2 3 NPV Project A Cash Flows (240,000.00) - - 325,000.00 Discount Factor 1.00 0.90 0.81 0.73 Discounted CF (240,000.00) - - 237,637.20 (2,362.80) 0 1 2 3 NPV Project B Cash Flows (198,000.00) 110,800.00 82,500.00 45,000.00 Discount Factor 1.00 0.90 0.81 0.73 Discounted CF (198,000.00) 99,819.82 66,958.85 32,903.61 1,682.28 NPV is the sum of future cash flows discounted to the present time and it is understood that only those projects which result in positive NPV must be accepted by companies and all those projects which have negative NPV ...Show more
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Financial Accounting [Instructor Name] Q1: (i) Components of Financial Strategy Two components of financial strategy are 1. The funds required by organizations and most appropriate methods for raising these funds. This involves evaluation of the funding requirements of the business and then approaching different venues for raising capital that is either through borrowing or issuing equity in the capital markets and collecting funds from shareholders’ investment in the company’s shares (Bender & Ward, 2012)…
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