Case Study – Risk Analysis

Case Study – Risk Analysis

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Case Study – Risk Analysis

Question 1

The value of each of the three investments was computed using an appropriate online calculator. The yield expected from investing in Capital Fashion Limited’s bonds was computed using a calculator developed by Moneychimp (2016). A screenshot of the calculator is presented below. The extant yield of the investment in the bonds would be 6.659%.

(Moneychimp, 2016)

The yield expected from investing in Agri Credit Limited’s preference shares was computed using a calculator developed by Calculatorpro (2016). Notably, the dividend yield is computed as the ratio of the annual dividend per share to the stock market price. A screenshot of the calculator is presented below. The extant yield of the investment in the preference shares would be 9.80%.

(Calculatorpro, 2016)

The yield expected from investing in Southern Cross Electrical Limited’s ordinary shares was computed using a calculator developed by Free Online Financial Calculators (2016). A screenshot of the calculator is presented below. The extant yield of the investment in the ordinary shares would be 3.561%.

(Free Online Financial Calculators, 2016)

Question 2

Recommended Investment

The researcher recommends that the investment company should invest in the Agri Credit Limited’s preference shares. The recommendation is hinged on various reasons. The principal reason is that the Agri Credit Limited’s preference shares hold the promise for the highest yield among the three investment options. As noted earlier, the extant yield of the investment in the bonds would be 6.659%. The extant yield of the investment in the preference shares would be 9.80%. The extant yield of the investment in the ordinary shares would be 3.561%. Investing in the preference shares will be beneficial to the company as the dividends given for such shares are fixed. The dividends ought to be paid out prior to the payment of common share dividends. Investing in the preference shares, especially cumulative preference shares, will be beneficial to the company as it will be paid all its dividends eventually when the company realizes profits after long periods of loss-making prior to the payment of common share dividends.

If Agri Credit Limited is liquidated or declared bankrupt, the investment company will have a bigger claim to the assets of the company than the ordinary shareholders. That means that the preference shares are rather attractive to investors who averse to risks. Agri Credit Limited will be guaranteeing the investment company dividends annually and a faster compensation of its investment in it than the ordinary shareholders. Overall, if the investment company investments in the Agri Credit Limited’s preference shares, Agri Credit Limited will be sure that its investment will be markedly safe while giving it a fixed, as well as regular, return.

The investment company should opt for investing in Agri Credit Limited’s preference shares rather than the ordinary shares of Southern Cross Electrical Limited since any new ordinary shares issued by Southern Cross Electrical Limited will dilute the investment company’s ownership and voting power. Investments in ordinary shares are rather risky since zero dividends are payable at the end of or within a given year. Investors in ordinary shares are burdened with organizational operational risks unlike those investing in preference shares.

The investment company should opt for investing in Agri Credit Limited’s preference shares rather than the bonds owing to varied reasons as well. First, characteristically, bonds attract lower returns than preference shares in the long term. Second, the prices of bonds fall as the rate of interest improve. Particularly, long-term bonds are rather hurt by fluctuations in prices when the rates are unsteady or fluctuating. That is especially so for fixed rate bonds. The bonds are exposed to marked interest rate risks. That means that the market prices of the bonds reduce when the overall extant interest rates improve.

Bond investments are as well prone to other risks, including prepayment risk, call risk, yield curve risk, sovereign risk, inflation risk, volatility risk, credit risk, exchange rate risk, event risk, and liquidity risk. The investment company should as well steer clear of investing in it since it may lose the whole investment in bonds if Capital Fashion Limited is declared bankrupt. If that was to happen, there will be not assurance of the amount of money that will be available still to repay the investment company. As well, varied bonds are rather callable, bringing about reinvestment risk.

The Industries’ Future Trends and Current Trends

Capital Fashion Limited operates is in the apparel industry. By and large, the worldwide apparel market continues delivering constant performance. That is regardless of the industry’s softer expansion in the East. As well, that is regardless of the much unappealing outlook in South America. The industry has in recent times, experienced steady recovery, as well as growth, in much of Eastern Europe. Even then, such recovery is elusive across Western Europe. The economies that are generally characterized as improving have still not provided significant growth enhancement to apparel sales.

Agri Credit Limited is a stakeholder in the agricultural financing industry. Many industries have in the past been financed by varied credit facilities. The facilities have been the principal financiers of the agricultural sector for many years. By and large, the facilities affect the financing of agriculture considerably. The major constraints faced by the facilities do not include financial constraints. Rather, the major constraints, or limitations, faced by the industry remain the shortage of proper storage facilities, the usage of inappropriate, and the usage of inefficient technologies. The facilities have shown that they can improve agricultural productivity when monitored stringently the limitations notwithstanding.

In the light of the constraints, there is a common recommendation that the agricultural sector should benefit from increased financial support. Besides, in the light of the constraints, there is a common recommendation that the agricultural sector should benefit from increased government support. The support is expected to bolster development in the industry. The support is expected to improve the environment in which the agricultural financers and other stakeholders operate (OECD & OCDE, 2016). The support is expected to bolster the related financial functions.

In recent times, many countries have tried dealing with the constraints through the development of agricultural financing. Many countries have tried dealing with the constraints through the expansion of agricultural financing. There is lots of interest in the utilization of technologies in facilitating commercial transactions in the agricultural sector. Registries for movable collaterals, credit registries, correspondent banking, as well as mobile banking are some of the classic examples of how the growing adoption of varied technologies in the industry is assisting in easing market malfunctions and failures in the industry. There are numerous, pending, thorough impact appraisals on such development as yet.

Appropriate risk management approaches are of marked significance to the agricultural financing industry. Various instruments, including index insurance, have marked potential for reducing moral adverse selection and hazards. As well, such instruments continue to encourage farmers and others to take up high-profit but high-risk investments. As noted earlier, for example, investments in ordinary shares are rather risky since zero dividends are payable at the end of or within a given year. Investors in ordinary shares are burdened with organizational operational risks unlike those investing in preference shares.

As noted earlier, the investment company should opt for investing in Agri Credit Limited’s preference shares rather than the ordinary shares of Southern Cross Electrical Limited since any new ordinary shares issued by Southern Cross Electrical Limited will dilute the investment company’s ownership and voting power. Southern Cross Electrical Limited is a stakeholder in the electrical industry. The industry is among the most significant commercial sectors worldwide. It boosts or thrusts other industries typically (Cui, 2016). The principal concerns that continue affecting the industry’s attractiveness to investors include under-invoicing by those importing electrical devices, inadequate technical and technological knowhow, and lack of the requisite infrastructure.

Question 3

As noted earlier, the researcher recommends that the investment company should invest in the Agri Credit Limited’s preference shares. That recommendation will not be affected by the downturn of the Southern Cross Electrical Limited’s profitability. As well, the recommendation will not be affected by the slowdown of the Southern Cross Electrical Limited’s growth.

Question 4

The required return rate for each of the three investment paths that would render the recommendation that the investment company should invest in the Agri Credit Limited’s preference shares indifferent to each of them is 9.8%. As noted earlier, the expected yield of the investment in the bonds would be 6.659%. The expected yield of the investment in the preference shares would be 9.80%. Lastly, the expected yield of the investment in the ordinary shares would be 3.561%.

References

Calculatorpro. (2016). “Dividend Yield Calculator.” Calculatorpro. Retrieved from

http://www.calculatorpro.com/calculator/dividend-yield-calculator/

Cui, Z. (2016). Printed electronics: Materials, technologies and applications. Hoboken: John

Wiley.

Free Online Financial Calculators. (2016). “Stock Calculator for Calculating Return on

Investment.” Free Online Financial Calculators. Retrieved from

http://www.free-online-calculator-use.com/stock-calculator.html

Moneychimp. (2016). “Bond Yield Calculator.” Moneychimp. Retrieved from

http://www.moneychimp.com/calculator/bond_yield_calculator.htm  

OECD & OCDE. (2016). Addressing the challenges in  higher  education. OECD iLibrary.