Assignment 1 s3872107 Le Dat Hoang Thanh PDF

Preview

Summary

BAFI3184: Corporate FinanceSemester 3, 2021UNIT CODE BAFIUNIT NAME Corporate Finance LECTURER Man Pham Duy CAMPUS SGS campus CLASS DATE AND TIME Wednesday, 3pm STUDENT ID S STUDENT NAME Le Dat Hoang Thanh ASSIGNMENT NAME Assignment one (20%) WORD LIMIT 1500 words WORD COUNT 1550/ ASSIGNMENT DUE DATE...

Description

BAFI3184: Corporate Finance Semester 3, 2021 UNIT CODE UNIT NAME LECTURER CAMPUS CLASS DATE AND TIME STUDENT ID STUDENT NAME ASSIGNMENT NAME WORD LIMIT WORD COUNT ASSIGNMENT DUE DATE

BAFI3184 Corporate Finance Man Pham Duy SGS campus Wednesday, 3pm S3872107 Le Dat Hoang Thanh Assignment one (20%) 1500 words 1550/1500 Sunday, 3rd April 2022, 23:59 pm

Assignment Cover Page

REQUIREMENTS 1 AND 2

According to salary explorer 2022’s website, the average salary for male financial jobs in Viet Nam is 18,800,000vnd per month. However, with 2 to 5 years of experience, the salary is increased by 32%. Thus it should be 24,816,000vnd per month. Therefore, I would like to choose

this standard to set for my beginning salary for the scenario which is myself at 25 years old with 3 years of experience in the financial industry.

INCOME

Pre-retirement

Husband

Post-retirement -

24.816.000,00

Interest Income

79.232,47

2.000.000

Dividends

41.360,00

3.000.000 -

Gifts Received (Childrens Tet) li xi

-

Wife Net rental income

5.000.000,00

Transfer From Savings Average

30.000.000 -

-

35.000.000

29.936.592,47 Table 1. Incomes of Pre-retirement and Post-retirement

Pre and Post - Retirement Incomes 40,000,000.00 35,000,000.00 30,000,000.00 25,000,000.00 20,000,000.00 15,000,000.00 10,000,000.00 5,000,000.00 0.00 Hu

an sb

d r te In

es

om nc tI

e Di

Gi

en vid

R fs

ds

d ve ei ec

hil (C

dr

)l et T s en

Pre-retirement

ix

i W

e if

Ne

en tr

l ta

i

om nc

e

Tr

rF fe s an

Post-retirement

Figure 1. Incomes of Pre-retirement and Post-retirement

ro

m

S

in av

gs er Av

ag

e

Pre-retirement 8.416.278

Post-retirement -

Home Expenses Daily Living

2.100.000 4.762.500

3.224.167 6.066.667

1.124.167 1.304.167

Transportation Health Insurance

3.516.667 656.667 333.333

10.516.667 1.865.000 5.200.000

7.000.000 1.208.333 4.866.667

Education Charity/Gifts

72.727 583.333

181.818 3.000.000

109.091 2.416.667

Entertainment Vacation

1.075.833 766.667

4.575.833 26.550.000

3.500.000 25.783.333

0 35.000

500.000 35.000

500.000 -

Savings Expense

SUBSCRIPTIONS MISCELLANEOUS OBLIGATIONS Total

1.663.200 0 23.982.205 61.715.152 Table 2. Expenses of Pre-retirement and Post-retirement

Changes (4.762.500)

(1.663.200) 41.386.724

Pre and Post - retirement expenses 70,000,000

60,000,000

50,000,000

40,000,000

30,000,000

20,000,000

10,000,000

0

S

i av

s ng

E

en xp

se

m Ho

e

p Ex

se en

s i Da

l

ng ivi L y Tr

sp an

o

t rta

io

n

a He

l th su In

e nc ra E

t ca du

Pre-retirement

io

n a Ch

r

s if /G y it

r te En

ta

i

nm

t en

t ca Va S

n io

S UB

I CR

P

ON TI I M

Post-retirement

Figure 2. Expenses of Pre-retirement and Post-retirement

S

EL SC

N LA

U EO

S

OB

LI

ON TI A G

S

t To

al

Pre-retirement

Post-retirement

Savings Expense

35%

0%

Daily Living

20%

10%

Transportation

15%

17%

Home Expenses

9%

5%

OBLIGATIONS

7%

0%

Entertainment

4%

7%

Vacation

3%

43%

Health

3%

3%

Charity/Gifts

2%

5%

Insurance

1%

8%

Education

0%

0,3%

MISCELLANEOUS

0%

0,1%

SUBSCRIPTIONS 0% Table 3. Percentages accounting on expenses of Pre-retirement and Post-retirement

1%

Pre-retirement expenses

1.01% 2.02% 3.03% 3.03% 4.04% 7.07%

35.35%

9.09%

15.15%

Savings Expense Daily Living Transportation Home Expenses OBLIGATIONS Entertainment Vacation Health Charity/Gifs Insurance Education MISCELLANEOUS SUBSCRIPTIONS

20.20%

Figure 3. Pie chart displays the percentages accounting on expenses of Pre-retirement

Post-retirement expenses Savings Expense Entertainment Education

Daily Living Vacation MISCELLANEOUS 8.05%

Transportation Health SUBSCRIPTIONS 0.10% 1.01% 0.30%

Home Expenses Charity/Gifs

OBLIGATIONS Insurance

10.06%

5.03% 3.02% 17.10%

5.03%

7.04% 43.26%

Figure 4. Pie chart displays the percentages accounting on expenses of post-retirement

As a single person, after-tax compensation accounts for 83% percent of my pre-retirement income. Rent and interest payments are among the others. After retirement, there are different sources of income most are from rental income, dividends and interest. Daily living expenses cost a lot during the pre-retirement and post-retirement stages, with 20 percent and 3 percent, respectively. In both periods, saving is encouraged because unforeseen events may occur. Education costs are also prohibitively expensive for the advancement of one's life and profession. After retirement, however, this keep unchanged. Vacations are limited at a young age because employment consumes all of one's time. However, three vacations each year after retirement costs a lot of money. Since retiring, I've increased my

giving back to the community by a factor of two. Due to the importance of health care and preservation, health-care costs are on the rise. The expense of transportation is also highered. Other expenses, on the other hand, are mostly have a lot of changes.

Month Jan

Monthly expenses in Pre- & Post-retirement periods (VND) Incomes Expenses Replacement Income required 150.880.000 35.000.000 ₫

₫

115.880.000 ₫ 38.715.000

Feb

35.000.000 ₫

₫

3.715.000 ₫ 33.215.000

Mar

35.000.000 ₫

₫

-

1.785.000 ₫

-

1.240.000 ₫

-

2.435.000 ₫

33.760.000 Apr

35.000.000 ₫

₫ 32.565.000

May

35.000.000 ₫

₫ 36.310.000

Jun

35.000.000 ₫

₫

1.310.000 ₫ 142.288.000

Jul

35.000.000 ₫

₫

107.288.000 ₫ 33.140.000

Aug

35.000.000 ₫

₫

-

1.860.000 ₫

-

1.937.000 ₫

-

1.256.000 ₫

-

2.462.000 ₫

33.063.000 Sep

35.000.000 ₫

₫ 33.744.000

Oct

35.000.000 ₫

₫ 32.538.000

Nov

35.000.000 ₫

₫ 140.582.000

Dec

35.000.000 ₫

₫

105.582.000 ₫ 740.800.000

Total Average

420.000.000 ₫ ₫ 35.000.000 ₫ 61.733.333 ₫

320.800.000 ₫ 26.733.333 ₫

Table 4. Post-Retirement Incomes and Expenses Summary

Because post-retirement income is insufficient to cover expenses (Table 4), a monthly replacement income must be set aside to cover post-retirement expenses: “Replacement Income required” = Total monthly expenses – income currently Thus, a 26,733,333 VNDreplacement income must be deposited monthly to sufficiently fund retirement budget plan. REQUIREMENT 3 An annuity-due cash flow is used to collect 26,733,333 VND at the beginning of each month since the 65th birthday. PV= PMT + PMT x PV= PMT + PMT x 26,733,333 + 26,733,333 x = 2,946,308,849 To reach planned retirement, 2,946,208,839 VND must be accumulated by the 65th birthday. Where: PMT is the monthly income requirement for post-retirement income. (VND/month) r (%) annual rate of return, compound yearly. n number of year (80 – 65 = 15) REQUIREMENT 4 I intended to generate a long-term investment during my pre-retirement years. With couple of years of financial experience, an investment yielding an average of 8.95 percent is expected. Although extremely undesirable risks are possible, the volatility is manageable in comparison to the broader equities market. Additionally, for long-term investments, the profits from successful

periods may somewhat cover losses. As a result, my Investor Profile is classified as Moderately Aggressive, according to table 4 and figure 5. Ave. Annual Return Standard deviation (%)

MODERATIVEL

(%) (2000-2017)

Y AGRESSIVE

(Measure of risk*)

Large Capitalisation Common Stocks Small Capitalisation

8,95%

17,75%

45%

Common Stocks International Common Stocks Corporate Bonds (long-term) Government Bonds (long-

10,33% 8,13% 6,20%

22,43% 15,94% 7,03%

15% 20% 5%

term)

4,00%

1,80%

5%

Treasury Bills (short-term)

0,70%

0,70%

5%

Cash

0,00%

5%

Table 4. Post-Retirement Incomes and Expenses Summary

WARR = x + x + x + x x + x + x = 0.45 x 0.0895 + 0.15 x 0.1033 + 0.2 x 0.0813 + 0.05 x 0.062 + 0.05 x 0.04 + 0.05 x 0.007 + 0.05 x 0 = 0.07748 = 7.748% My long-term investment is predicted to produce a modest 7.748 percent annual Weighted Average Rate of Return, which will enable me to spend comfortably after retirement.

MODERATE AGRESSIVE

5.00% 5.00% 5.00% 5.00% 45.00% 20.00%

Large Capitalisation Common Stocks Small Capitalisation Common Stocks International Common Stocks Corporate Bonds (long-term) Government Bonds (long-term) Treasury Bills (short-term) Cash

15.00%

Figure 5. Pie chart displays the distribution of investments PMT = = = 907,556 VND Where: PMT is the monthly contribution required to amass the funds necessary to retire at the age of 65. (VND/Month) FV is the money saved from 25th to 65th birthdays to begin spending at 67th birthday, which equals the calculated cash required at 67th birthday's start.. (VND) r (%/year) is the projected rate of return on long-term investments and savings. n (year) is the total of year from the age 25 to 65 which is 65 – 25 = 40 year.

As a monthly deposit starting on the 25th birthday and continuing until the 65th birthday, an annuity payment of 907,556 VND each month is required to collect sufficient cash to retire at the age of 65. REQUIRMENT 5

Table 5. The association between Annual of return and risk Risk management is the process of identifying the hazards associated with an investment and then managing them optimally. Risk management is critical since it can either mitigate or increase risk, depending on the investors' and portfolio managers' objectives (H. Kent Baker and Greg Filbeck 2015). To compensate for increasing risk, higher rates of return are required. In other words, the greater the danger, the greater the reward — and vice versa, the lesser the risk, the lesser the reward (Lumen n/d). The most frequently purchased investment items are stocks, bonds, and mutual funds (Investor.gov n/d). I would like to divide the investment to different periods which can display more accurate the willing of choice with more suitable scenario of investment’s psychology.

I.

The Beginning (age 25 – 45) As mentioned in Requirement 4 (R4), with a young experience about 3 years’ experience in the financial industry. The ‘Moderate aggressive’ is my optimal choice

due to the capability to suffer through risk. However, an expectation of a high return is strongly existed in a long run investment.

Small-cap firms have the potential for rapid growth, which makes them attractive investments, even though their stocks may be more volatile and therefore represent more risks to investors (Anna-Louise Jackson, John Schmidt 2021). However, it has a high risk which up to 23.38% but it brings back more than 11% of profit. That is why 15% of portfolio is spend for it. The largest money of fund is invested in large capitalization common stocks (LCCS) because even if they are very new, large-cap corporations are likely to be well established and prominent in their respective industries. This is because some companies go public and instantly achieve a market capitalization of more than $10 billion (Anna-Louise Jackson, John Schmidt 2021). Although, the risk assessment for this task is up to 18.70%, it still be an endurable investment in long-term with satisfied profit. Besides, my 20% of investment fund would be in the international common stock (ICS) with 16.9% of acceptable risk. The 20% others I would like to spread equally to Cash 5%, Government bonds 5%, Corporate Bonds 5%, Treasury bills %. This could help me to have a stable backup which can against inflations, financial crisis (Charles Swab & Co., Inc. 2021). WARR is 7.75% annually is expectedly feasible to spend comfortably on a retirement plan. While losses are highly possible, net interest over a long run of time is still beneficial.

II. The end (46 – 65) . Ave. Annual Return

Standard deviation (%)

Moderative

(%) (2000-2017)

(Measure of risk*)

conservation

Large Capitalisation Common Stocks Small Capitalisation Common

8,95%

17,75%

25%

Stocks International Common Stocks Corporate Bonds (long-term) Government Bonds (long-term)

10,33% 8,13% 6,20% 4,00%

22,43% 15,94% 7,03% 1,80%

5% 10% 10% 20%

Treasury Bills (short-term) Cash

0,70%

0,70%

0,00% Table 6. The association between Annual of return and risk

10% 10%

WARR = x + x + x + x x + x + x = 0.25 x 0.0895 + 0.05 x 0.1033 + 0.1 x 0.0813 + 0.1 x 0.062 + 0.1 x 0.04 + 0.2 x 0.007 + 0.1 x 0

= 0.0506 = 5.06%

In these stages, the portfolio now is shifted to lower risk management, due to the nearer of retirement. Thus, the ‘Moderative conservation’ in this circumstance is the optimal choice. The primary advantage of fixed income for investors is the reduced risk and potential for capital loss. Fixed income, as comparison to equities, is far more stable and bears fewer risks due to its lower exposure to macroeconomic hazards (e.g., recessions, geopolitical risk) (Wall Street prep n/d). Thus, half of the fund is invested in the fixed income, 20% in the government bonds with 1.8% of risk, 10% in Corporate Bonds, Treasure Bills, Cash with 7.03%, 0.7%, 0% of risk. The 25% of portfolio is spent in Large Capitalisation Common Stocks to gain a sufficient profit with acceptable risk 17.75%. The others 15% are in Small Capitalisation Common Stocks (SCCS) and ICS to expect a well return. With 5.06% WARR the profit is not high, but it brings the attitude of comfortable. III. Financial crisis If there is a repetitive event as financial crises before, ‘moderative conservation’ still be a best option to ensure. Small-cap equities pose a significant risk to investors during economic recession. Thus, only large-cap equities are purchased, albeit at a 15% discount. Another 5% is allocated to overseas equity, with the hope that the international markets are unaffected by local ones. The majority of 50% and 30% are allocated to fixed income securities and cash investments, respectively, due to their long-term low volatility. As a result, a WARR of 5.06 percent may be feasible.

REQUIREMENT 6 Economic, events and unforeseen political, all have the potential to affect financial markets. As a result, an investor's prompt recognition and evaluation of their influence on his or her personal financial plan is critical. Although the financial market is difficult to forecast, particularly during times of global crisis, reference effects can be deduced from the past. A. Economic – Great regression 2007 - 2009 The Great Recession began in the United States in 2007–08 and quickly spread to other countries. The financial crisis, marked by a sharp decline in liquidity in global financial markets, began in 2007 as a result of the collapse of the US housing bubble (Brian Duignan n/d). Banks and other investors in the United States and overseas increased their borrowing in the run-up to the GFC in order to grow their lending and acquire MBS securities. Borrowing money to acquire an item raises potential profits but also potential losses (a process known as growing leverage). As a result of their excessive borrowing, banks and investors suffered huge losses as property prices began to collapse (RBA n/d). The investment outcomes could potentially develop with significantly higher returns as a result of the consequences of money-easing policy. Additionally, a Moderately Aggressive, or even an Aggressive Allocation plan with a higher share of equity market exposure may be worth considering for greater success.

B. Politic – Crisis in Venezuela Venezuela is amid a political crisis under President Nicolás Maduro's authoritarian administration, who looks to have been consolidating authority over the political opposition in recent months. Venezuela's political dilemma is rooted in an economic disaster (Rebecca M. Nelson 2018). Venezuela, with its illogical system of currency controls, is by far Latin America's most dysfunctional economy. This year, inflation is predicted to exceed 1600% (Nathaniel Parish Flannery 2017). Individuals and businesses in Venezuela are unable to exchange foreign money through the conventional exchange market (banks, exchange bureaus, etc.). Rather than that, customers must go through a bureaucratic process at an official institution in which they are instructed to apply for

limited amounts of currency for personal or business needs, with no assurance of success (Yohama Caraballo-Arias, M.D., Jesús Madrid, and Marcial C Barrios 2018).

Due to the substantial reliance on equities and fixed income markets in my portfolio, any political shocks might easily wipe out my investing and saving efforts through significant losses. Thus, it is critical for me to immediately acknowledge and revise my investment plan in order to conserve cash and avoid losses, particularly during political situations.

Figure 6. Real GDP Growt...