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Shareholder Value Creation Case Study

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Shareholder Value Creation

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Case 5: Genzyme and related investors:

Objective of this case

The case focuses on corporate governance issues by discussing how the objectives of a large activist shareholder can potentially conflict with the core vision of the target company’s management.
Learning how capital investment and payout policy decisions can affect shareholder value creation.
The case offers an opportunity for discussion on how board composition and executive compensation may help align management with shareholders’ interests in a public company.
Please listen to the video first: http://youtu.be/6LF_CB7Pa3U

Shareholder Value Creation

Summary of case 5

Genzyme reached record revenues of $4.6 billion in 2008 and was expected to generate an increasing level of free cash flow in coming years. But operational problems in one manufacturing plant had led to a warning letter in late February 2009 from the U.S. Food and Drug Administration (FDA), which, combined with news on impending health care reform, had pushed Genzyme’s stock price from a high of $70.42 down to a low of $56.38.

Genzyme was being targeted by Relational Investors (RI), an “activist” investment fund that had a 2.6% stake in the company at the end of March 2009. RI had a history of engagements with the boards of numerous companies that, in several instances, resulted in the CEO’s forced resignation.

Ralph Whitworth, RI cofounder and principal, met with Termeer and delivered a presentation, arguing that Genzyme was trading at a discount.

He offered recommendations on how Genzyme could address this:

(1) improve capital allocation decisions;

(2) implement a share-buyback or dividend program;

(3) improve board composition by adding more members with financial expertise; and

(4) focus executive compensation on performance metrics.

Shareholder Value Creation

Table 1

		Data in Case:
What’s a biotech company?	Rare diseases/genetic disorders/small populations FDA approval (expensive/slow/low probability)	Case pgs. 2–3
How do you succeed?	Orphan drug (seven-year exclusive) Intensive R&D/strong pipeline	Case pgs. 2–3 Case Exhibit 4
Genzyme’s business model	Diversified: segments (GD-CR-BI-HO) GD CR BI HO Other % revenues 53% 22.8% 10.6% 2.4% 11.1% CFROI 25.8% 8.8% Acquisitions ($ million 97–07) 12 1,943 942 2,081 596 Free cash flows (funding acquisitions): expected to grow	Case Exhibit 7 Case Exhibit 8 Case Exhibit 6 Case Exhibit 13
Genzyme’s financial strategy	No dividends and open-market repurchases (some competitors do!) No debt	Case p. 6 Case Exhibits 1 and 4

GENZYME AND RELATIONAL INVESTORS:

SCIENCE AND BUSINESS COLLIDE?

Table 2

		Data in Case:
What is Relational Investors?	Activist investor (vs. Carl Icahn or others?) Engagement battles (% acquired, changes, length of stay?) Performance	Case Exhibits 10 and 11 Case Exhibit 9
Keys to success?	Industry expertise—CFROI analysis Focus: corporate governance Quick turnover: invest, make changes, exit!	Case Exhibit 8
Why target Genzyme?	Intrinsic vs. market value Free cash flow Focus on GD—CFROI 2.6% stake—is that a lot? other shareholders?	Case Exhibit 12 Case Exhibit 13 Case Exhibits 7 and 8 Case Exhibits 2 and 11

Shareholder Value Creation

GENZYME AND RELATIONAL INVESTORS: SCIENCE AND BUSINESS COLLIDE?

Table 3

Issue	Relational Investors’ Criticisms	Genzyme’s Defense	What Happened?
Capital allocation	Diversification outside GD (case Exhibit 6) is destroying shareholder value because non-GD segment’s CFROI low (case Exhibit 8).	Diversification is necessary and investments in biotech take long time to pay back.	Capital allocation committee (chaired by Whitworth); hold on new acquisitions; sale of genetics testing business (2010-Q3).
Share repurchase	FCF should be returned to shareholders in buybacks (see other firms—case Exhibit 4) when internal use generating less than cost of capital (case Exhibit 8).	Need FCF to make long-term investments.	Announcement of $2 billion open-market share buyback program and debt issue (2010-Q2).
Board composition	Need new board members with finance and accounting backgrounds.	Termeer needs board on his side in case of fight (as with Icahn in 2007).	Added to board: Bertolini, Whitworth, one Icahn director (Burkaroff) and two independent directors. (Exhibit TN5)
Executive pay	Incentives are based on revenue generation and not profitability.	Sensitive subject for Termeer and board.	Revised bonus incentive structure

Assignment of case 5

What is the business model for Genzyme? What does Termeer want for his company going forward?

See table 1 of case 5 in the case reading file

What is the business model for Relational Investors?

See the table 2 in the case reading file

Should Termeer fight Whitworth?

a. Or can Termeer manage him by agreeing to some of Whitworth’s demands but avoid giving into demands that might compromise the core mission of Genzyme?

b. If so why? How might those changes improve or adversely affect the company and performance?

See the table 2 in the case reading file

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Shareholder Value Creation Case Study Essay

Case 5

The business model is the treatment aiming at individuals with genetic diseases. Genzyme’s business model is diversified with five segments namely: GD, CR, BI, HO and other. Percentage revenue generated by GD, CR, BI, HO and other are….

What is the business model to the rational investor?

The business model of Rational Investor is concerned with profits and rational investor aims at companies with bad…

Should Termeer fight Whitworth?

Termeer should try to create a compromise for both his key missions for…..

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Corporate Value Creation Case Study

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Corporate Value Creation

Case 4: The Battle for Value, FedEx Corp. vs UPS

Summary of case 4:

This case assesses the financial performance of FedEx Corp. and United Parcel Service, Inc (UPS). The two firms have competed intensely for dominance of the overnight express package industry. This case is intended for use in an introductory discussion of corporate value creation and its sources.

Objectives:

The contrasting record of the two firms affords a platform to:

Define excellence from a corporate-finance perspective.
Assess economic profit analysis (also known as Economic Value Added) and, more generally, the measurement of financial performance and health. The case provides a complete historical economic profit analysis for both firms, and permits comparison with other classic approaches to historical performance analysis.
Evaluate the financial implications of rigorous competition and corporate transformation.

Corporate Value Creation

Main concepts of case 4

Economic Value added: definition, Strength and weakness, the factors that affect EVA

Key information:

1. FedEx is growing more rapidly than UPS.

2. The stunning comparison between FedEx and UPS appears in the returns to investors, given in case Exhibit 8, and summarized in the third row of Table 1.

3. Economic profit analysis is generally consistent with the market return analysis.

Table 1. The strengths and weaknesses of various financial measures.

	Strengths	Weaknesses
1. Direct inspection of the financial statements	Reveals trends Comparison of absolute sizes	Does not permit a ready assessment of efficiency Biased by size differences Book, not market, values Influenced by GAAP choices Backward, not forward, looking
2. Financial ratios	Adjusts for size differences (a relative, not absolute, measure)Provides comparative measures of efficiency and growth	Based on book, not market, values Influenced by GAAP choices
3. Earnings per share (EPS) and price/earnings ratios	Widely-used measures of performance Linked to market price of stock	EPS influenced by GAAP choices EPS is not a cash flow P/E difficult to interpret Sensitive to choice of observation period
4. Total returns to investors	Cash flow based Market value based Permits bench marking vs. other investments	Sensitive to choice of observation period Needs to be risk adjusted
5. Economic profit (EVA)	Risk adjusted Permits bench marking Theoretically linked to market values Logically appealing Increasingly widely used	Influenced by GAAP choices Ignores latent option values

Table 2 THE BATTLE FOR VALUE, 2004: FEDEX CORP. VS. UNITED PARCEL SERVICE, INC.

Corporate Value Creation

Summary of Comparative Results

	FedEx	UPS	Source (case exhibit number)
Financial ratio analysis Activity Liquidity Leverage Profitability Growth	Improving Improving Declining Worse than UPS High	Weakening Better than FedEx Consistently low Better than FedEx Lower than FedEx	2, 3
EPS EPS compound annual growth rate (CAGR) 1993–2003 EPS compound annual growth rate (CAGR) 1999–2003	27.54% 6.98%	13.89% 34.30%	8
Total market returns Cum. total return (1992–2003) Cum. return net of S&P (1992–2003)	528.02% 372.83%	705.95% 550.75%	8
Economic profit – EVA 2003 Cumulative for 1992–2003 EVA Market value added Difference	(in millions) $170 ($2,252) $11,191 $13,443	(in millions) $1,195 $4,328 $62,028 $57,700	9, 10

Case 4 Assignment

1) What happened to FedEx and UPS’s stock price in early 2004? Why did they rise? Why did one outpace the other? In an efficient market, how are we to interpret FedEx’s 14% increase in market value?

how is a stock value determined?
- how does the air-transportation agreement affect the two firms stock price?
  - both UPS and FedEx had been laying the foundation for a regional- and international-delivery business in China since the late 1990s. Thus, the latest announcement may indicate the market’s acceptance of that strategy and both firms’ ability to exploit that opportunity.
  - FedEx had acquired air routes into China as early as 1995, whereas UPS did not begin its direct flights into China until 2001.

2) How have UPS and FedEx performed financially? How do you measure financial performance? What do the financial statements and ratios show? What does the stock-price performance tell you? How is EVA calculated? What does it reveal? Does stock price track the historical EVA?

Discuss this questions based on the table 1 and table 2 in the case study file
EVA: a measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.

3) This is a pretty depressing picture for FedEx: Why hasn’t its stock price fallen in absolute terms? How can we rationalize the expectation that FedEx will preserve the value that it currently has?

Hint: think of the EVA limitation in table 1.

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Corporate Value Creation Case Study Essay

Part 1

What happened to FedEx and UPS’s stock price in early 2004?The stock price of both FedEx and UPS increased. There was an increase in the price of both the companies because of the companies cum total return from 1992 to 2003, as well as the EPS compound annual growth rate, is high though compound growth rate for FedEx decreased within the years 1999 to 2003. Economic value added of the two companies within 1992 to 2003 is significant. EVA is a representation of company performance and it focuses on shareholders’ value hence its high value shows that the company stock price of the companies in…

Part 2

UPS financial risk is low since its analysis ratio on leverage is low while FedEx financial risk is reducing as indicated by its leverage ratios. Both UPS and FedEx are more liquid, liquidity ratios show that both firms are performing better. Activity ratios show that FedEx is more active than UPS. In conclusion, the two firms’ financial performance is….

Part 3

FedEx profitability ratio is worse, showing that the company is less profitable. Low profitability of a company lowers the company EPS thus lowering its…..

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How industrial revolution affected women in minorities in the 19th century

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How industrial revolution affected women in minorities in the 19th century

Analyze how the industrial revolution affected women in minorities in the 19th century.

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How industrial revolution affected women in minorities in the 19th century

The industrial revolution epitomizes an era in which women empowerment gained prominence, as women became educated and increasingly participated in the workforce. Women could now be employed, develop their skills and cater for their families unlike before when they had to depend on men or work at home.

As the world moved towards factory manufacturing, more women had the opportunity to work outside their home and also get professional education. The 19^th century is also considered a notable period in relation to early feminism. Minority women however did not benefit from women empowerment until later in the industrial revolution.

Guy-Sheftall (2011) notes, that minorities and particularly women were overlooked in the 19^th century’s democracy expansion. While the whites, also known as the majority had better opportunities for education and participation in the workforce, minority women were often sidelined in such developments. The 19^th century was characterized by the fight for women rights, mostly the right for equal recognition under the law and right to vote. Previously, women were expected to be homebound and thus take care of domestic jobs such as cleaning, cooking and child-bearing and would not be allowed to socialize.

This meant that women did not have an opportunity to work or get an education. As more women participated in the workforce, they also sought to be freed from domestic labor. This was achieved through employing other women of lower class in their homes, consequently increasing the level of slavery among women minorities (Auguste, 2018). More domestic servants were needed to work in middleclass homes and this was mostly given to minority women.

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The Effect of Online Sales on the Art Market Research Journal

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Research Journal

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The Research JOURNAL (not paper) documents the stages of the intellectual journey that got you through the dissertation. It’s a ‘scrap book’ of things you’ve seen, read, and thought about. It is NOT a bunch of printed out stuff you’ve collated from the Internet, or from articles and books. It documents AND comments on your research. And explaining why which sources where useful etc.

You can present the process of your research as a digital format such as on Workflow
basically 1)go through the dissertation 2)main ideas 3)main developments 4)how these came about 5)sources used and comments and how these contributed to any ideas and thoughts

The Research Journal documents the stages of the intellectual journey that got you through the dissertation. It’s a ‘scrap book’ of things you’ve seen, read, and thought about. It is NOT a bunch of printed out stuff you’ve collated from the Internet, or from articles and books. It documents AND comments on your research. And explaining why which sources where useful etc.

You can present the process of your research as a digital format such as on Workflow
basically1)go through the dissertation 2)main ideas3)main developments4)how these came about5)sources used and comments and how these contributed to any ideas and thoughts

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The Effect of Online Sales on the Art Market Research Journal

A Background

The online art market has evolved tremendously in the last decades, leading to a transformation not only witnessed in how art is developed but also how it is sold and distributed. A study of these changes and particularly the role of the internet in the changing façade of art inspired great interest in me as I sought to understand the changes in both the primary and secondary art markets. It is interesting to note how online sales have opened up new doors for artists and art buyers and collectors through enabling a reach that permeates global borders.

Artists no longer have to rely on physical locations to sell their art and buyers are not restricted to buying art in their home countries only thanks to online sales. Notably, the value of global online art sales increased by 24% between 2014 and 2015, and that by the year 2020, it is expected to hit US$9.58 billion (Hiscox, 2017). In recognition of this momentous growth in art, a further inquiry into how online sales have affected different markets including primary art galleries, auction houses and art fairs was considered ideal for this research.

The aim was to understand how different art markets are responding to the changes emanating from increased online art sales and what it means for the future of art. This journal details my intellectual journey in writing my research, providing my experiences in the development of ideas, how these came about and how the various sources consulted contributed to creation of the research.

The research process

Developing this dissertation required that I plan effectively in order to ensure that the objectives of the research were accomplished. A summary of the various steps undertaken during the research are illustrated as follows.

Research Focus and Topic

Art in general has undergone significant progress, both in terms of art development and art market transformation. On the other hand, the internet has become an important aspect in today’s world as individuals increasingly gain access to the online technology. E-commerce as it is commonly known is the epitome of internet connectivity, enabling individuals from across the globe access products from all corners of the world through online selling.

Art has not been excluded from this advancement and online sales are continually dominating the art market. e-commerce and its impact on sales was the backbone of this research in a bid to establish how the art market was responding to this development. To suit my research, I opted to study the “The Affect of Online Sales on the Art Market.” This topic would allow me to explore how the art market has changed in the advent of online selling. To further enrich my research, I wanted to explore different art markets and how they have been affected by online sales.

These markets included primary art galleries, auction houses and art fairs, all of which have experienced significant transformation as a result of online sales. By studying each of the listed markets, I would be in a better position to understand how different players in the art market are adjusting to the new model of selling online. At the same time, I felt that studying the various markets would not yield the intended results unless I incorporated case studies to accompany the literature. This would give a better understanding of the how the art market has been affected by online selling by providing real-life examples of the various markets.

Main Ideas

One of the main ideas in my research was the role played by the internet in interconnecting people and hence the resulting convenience in trade. Since the advent of the internet, many possibilities among them online selling have emerged and these have transformed the world to a significant extent. This idea was at the core of the research because it sought to determine how online sales have influenced the art market. By understanding that internet connectivity is responsible for creating the online market, it was possible to deduce why the online market is so large and why it provides limitless opportunities for artists.

The second idea has to do with how players in the art market have positioned themselves to deal with growth in the context of online sales. As physical art sale locations continue to lose market due to the rise of online sales, it is only natural for entrepreneuring entities to refocus their strategy to the direction of online sales in order to capture the growing market. The research brings out this factor through the assessment of online art galleries and how they have managed to capture the online market as the physical galleries record deteriorating sales.

Based on this idea, the study examines the emergence of innovative online techniques to capture the market including the development of apps and websites features that enable buyers to evaluate and purchase art online. In this quest, the research examines popular apps including Magnus and websites such as Artsy, Artnet and Artspace. These not only demonstrate how art is being sold online but also the extent to which artists can reach a large market through such platforms compared to traditional art markets…..

Research Journal

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Oligopoly Theory Case Study

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Oligopoly Theory

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Watch a Youtube video or review an article on the Pfizer-Allergan merger. Write a 1-page paper commenting on the reasons for the failure of this merger within the context of oligopoly theory.

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Oligopoly Theory Case Study Essay

Drug maker Pfizer Inc. and Ireland-based Allergan Plc (AGN.N) merger deal was meant to save Pfizer about $35 billion in taxes. Pfizer canceled the $160 billion merger after President Obama’s campaign to stop US companies from heading overseas succeeded. Pfizer in its opinion maintains that the decision was driven by new treasury rule amendments aiming at such deals, termed as inversions.

Obama termed the merger deal as one of the most insidious tax inversions since the deal was meant to relocate Pfizer’s headquarters to Ireland and save the company huge amount of tax. Following this effects, lawmakers argued that tax inversion is not the best way to deal with U.S huge tax rate but rather….

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Europe on the Eve of World War 1

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Europe on the Eve of World War 1

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Week 1
Europe on the Eve of World War 1

There is a fairly common view of Europe as a “powder keg” on the eve of World War I, to which the assassination of the Grand Duke Ferdinand in Sarajevo merely provided a “spark.” Professor Merriman veers toward this point of view. For this first week’s discussion I would like you to take the role of an American diplomat who resides in the capital city of one of Europe’s great powers (London, Paris, Berlin, Vienna, Rome, or St. Petersburg) who is called upon to report on the situation there in May 1914. What issues are stoking fears of war and what factors are pointing toward preservation of peace? Please do not jump ahead to the Summer of 1914.

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Europe on the Eve of World War 1 Essay

The current situation reflects a world in which the desire for power is overwhelmingly discernible. Residents in Austria are worried about what could happen and many speculations linger regarding a potential war. Issues stocking fears of war include the current political atmosphere, given Europe’s willingness to defend its national interests even if it means going to war and the issue of balance of power in Europe. This can be explained by imperialism which has affected Europe’s balance of power and thus impacted on the system rendering it unworkable (Martin, 2017).

This means that in pursuit of power, competition is apparent and this could be a sign of a pending war. There exists a security dilemma in which nations must be prepared for war just in case it happens (Schroeder, 2000). With such kind of preparation characterized by the organization of troops, strategy development and investment in war weaponry, nations are effectively prepared to handle war and therefore more likely to engage in war unlike if they were not prepared. The existence of alliances is by far an indication that war is a possibility (Cornish, 2018).

It can be interpreted that each of the alliances is willing to protect its interests and that if this means war, this is what could result (Clark, 2013). Territorial differences that were unresolved also present possibilities of war as each territory seeks to protect its interests. The alliance between Germany and Austria-Hungary for example led to the creation of tension between Europe and Germany, following Germany’s development of a battle fleet that led to some kind of competition in naval arms development (Imperial War Museums, 2018).

Such relationship strains present vulnerabilities that may result in war if they are further provoked. Another example is the strain between Austria and Serbia, with Serbia being considered a threat to Austria in terms of multi-ethnic empire stability…..

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Theoretical basis of Finance Paper

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Theoretical basis of Finance

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Critically assess and evaluate the theoretical basis of finance.
Critically analyse, interpret financial data, by the integration of theory and practice investigate and apply relevant tools to the assessment of a variety of organisational problems.
Systematically evaluate and synthesise the problem solving mechanisms in relation to financial decision making, utilising application of relevant tools and techniques.

Assessment Task:
Using the FAME database, choose a publicly quoted company of your choice.

Write a business report of 2,400 words on the company from the stance of a potential investor. Your review of the company should discuss which key areas you are considering and why. The use of ratios should be accompanied with the limitations associated with their use and what additional data would be required for a full financial review. Your review should incorporate a commentary as to how well the company is performing within its industry sector and/or against a main competitor.

Theoretical basis of Finance

Consider why there may be differences. Looking to the future, discuss what main risks and opportunities the company is facing and how they are addressing these. This section of your report could include both a financial and a non-financial analysis. Appendices may be used to contain information to support your report. It would not be expected that a full set of accounts should be included in the appendices, but extracts from the accounts may be appropriate. One of the appendices should contain your bibliography. The appendices are not included in the word count.

Write a business report, maximum number of words 2,400, to evaluate a public limited company (PLC) of your choice. Your report should detail the areas that you would consider necessary to review and why, including limitations of the analysis. The report should finish with conclusions and recommendations for the investor.

FORMAT & GUIDANCE

Presentation

Please refer to the Assessment Guidance (on moodle page) for detailed information on:

– Academic Malpractice

APA Reference Guide
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Excess word count penalties

Theoretical basis of Finance

University Generic Marking Criteria

It is your responsibility to ensure that you are familiar with the above as failure to do this may impact on your achievement in this assessment

APA Reference Guide and Information can be found here: https://ganymede2.chester.ac.uk/index.php?page_id=1553173 and https://portal.chester.ac.uk/LIS/Pages/FindingInformation/referencing.aspx

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Theoretical basis of Finance

Jaguar Land Rover Automotive PLC is a holding company for the automotive company by the same name. The company, headquartered in Coventry, UK is a subsidiary company to Tata Motors. This paper focuses on the financial analysis for Jaguar Land Rover PLC by looking into the various metrics of financial performance. These metrics used in this analysis include the measures of profitability such as the net profit margin, the return to shareholders’ fund, and the return on capital employed. Other metrics used are the analysis of the company’s liquidity and gearing.

Profitability

Net profit margin

Net profit margin is the ratio that analyses the company percentage of revenue left after all the expenses have been deducted. It shows the company profit earned from the sales it has made. Net profit margin is calculated as: net profit divided by sales multiply by one hundred. Higher net profit margin is an indicator that the company has a good pricing strategy and control any cost incurred effectively. “Jaguar Land Rover Automotive PLC” can use this ratio to compare its performance with other companies in the same industries since firms in the same industry experience almost same environmental change, has got similar cost structure and common customer base (Kraft, 2014).

The net profit margin of a company that is higher than 10% is considered to be better, however, the rage of best net profit margin depends on the industry that the company operates in. in the case of “Jaguar Land Rover Automotive PLC,” it will be good if the company would have been having 10% or more. In general conclusion, the higher the profit margin, and the more profitable the firm is and this margin is affected by the operating expenses (Brigham & Ehrhardt, 2013).

In the years 2009 and 2010, the company made losses and therefore was not having a net profit margin. This implies that the company expenses in the years 2009 and 2010 are proportionately higher than the years after, it also indicates poor pricing and model and ineffective control of business costs. In the years 2011, 2012, 2013, 2014 and 2015 the company profit margin shoots to over ten percent that is, 11.30%, 11.15%, 10.61%, 12.90% and 11.95% respectively. This indicates a perfect improvement by the company as compared to the previous years.

In these three years, the management of the company seems to have formulated good pricing strategies and exercised effective cost control. This, in turn, has caused the company profit to increase by larger amount hence increased profit margin (Fitó et al., 2013). The company expenses during these five years are observed to be proportionately lower than in the years 2009 and 2010. The company profit margin has decreased by a relatively bigger margin in 2016 and 2017; profit margin has dropped to 7.01% in 2016 then further to 6.27% in 2017 provided the company turnover is higher in those years. Company’s costs have increased in these two years as compared to…….

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The Armenian Genocide

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The Armenian Genocide

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3. The Armenian Genocide
Please review the Week 2 Learning Resource “The Armenian Genocide” and discuss the extent to which this event resulted from long standing hostilities as opposed to the immediate circumstances of the war. Please note that the link for this resource opens a general summary of the events. You should also read the “Chronology” and perhaps some of the “Documents.”

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The Armenian Genocide Essay

Long standing hostilities to a significant extent perpetrated the Armenian genocide as opposed to the immediate war circumstances. A historical review of factors preceding the genocide reveals that there was a buildup of political, social, cultural and religious division that had existed for centuries between Armenians and the Turks. The Armenians despite being part of the Ottoman Empire were discriminated against and considered a threat to the Empire which was predominantly Muslim. The Armenians albeit being discriminated still managed to become successful both economically and socially, further leading to distrust by the Turks who were constantly frustrating their efforts (Hovannisian, 2016).

The Armenian genocide was planned long before World War I and this is an indication that the Young Turks had already envisioned the execution of the Armenians. The war only acted as a disguise and as noted by Genocide Museum (2016), the genocide was planned between 1911 and 1912 before the war began (Genocide Museum, 2016). The religious divide in the Ottoman Empire can be established as one of the major causes of tension between the Armenians and the Turks.

The Ottoman Empire was predominantly Islam and while the government claimed to provide equal opportunities for all, people from ‘inferior’ religions were subjected to various oppressive conditions including social and financial restrictions such as poll taxes in exchange for tolerance (Hovannisian, 2016). It was clear that the Armenian population was considerably discriminated based on their religious affiliation but despite this, the Armenians went on to prosper and this created wariness and resent among the Turkish neighbors (Safrastyan, 2015).

This created both social and political tension, more so when the Armenians sought equal to establish their own independence, self-assertion and protection in the midst of hostility from the Turkish government (Suny, 2009). The Turks were ravening to block the ascent of the Armenians and their lingering resentment for the Armenians led them to plan the genocide……

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Investment Banks and Financial Institutions

Investment Banks & Financial Institutions

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Investment Banks and Financial Institutions

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Investment Banks and Financial Institutions

1. Answer questions 4-8 in the attached document.
2. Answer Problems 35, 37, 39, and 41 in the attached documents then answer them again using the below scenarios.
3. Redo problem 35, assuming a coupon rate of 8% in part a, and yields to maturity of 12 and 12.5% in part b ?
4. Repeat problem 37, assuming that the zero coupon bond has 7 years to maturity.
5. Repeat problem 39, assuming that the three bonds under consideration have 6 years to maturity.
6. Repeat problem 41, assuming that the fair present value rose from $975 to $ 990.

Investment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services. Investment banks act as intermediaries between investors (who have money to invest) and corporations (who require capital to grow and run their businesses).

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Investment Banks and Financial Institutions

PART 1
Questions 4 to 8
Question 4
Identify whether a bond will be considered a premium bond, a discount or a par bond
a) A bond with a market price higher than its par value is a premium bond
b) A bond with a coupon rate equals to its yield to maturity is considered a par bond
c) A bond with a coupon rate less than the required rate of return is considered a discount bond
d) A bond whose coupon rate is less than its yield to maturity is considered a discount bond
e) A bond whose coupon rate is greater than its yield to maturity is considered a premium bond
f) a bond whose fair value is less than its face value is considered a discount bond

Question 5
How equity valuation differ from bond valuation
Valuation of equity onsiders dividend on stock, growth rate, rate of return. These considerations are appropriate where an entity uses dividend growth model
formular where dividend growth factor is equal throughout: Po = D1/r – g
where dividend growth factor is not equal: Po = {Dn (1 + gn)/r – g} (1/(1 + r)n)
Valuation of bond considers bond coupon rate, investors required rate of return, maturity value and maturity period
Formulae = (Intr x PVAF) + (MV x PVIFrn)

Question 6
What happens to the fair present value of a bond when the required rate of return on the bond increases
An increase in required rate of return lowers the fair present value of a bond

Question 7
A change in interest rate affects the price of of both short and long because change in interest rate affects the yield of both and long and short-term loan
Long-term bond’s price is more affected by increase in interest rate due to long duration they cove

Question 8
Bond’s price with large coupon rate are affected with the change in interest rates more than bond’s price with a small interest rate.
This is because large coupon rate reduces bond’s price by a larger margin.

Investment Banks and Financial Institutions

PART 2
Aswer problems
Problem 35
a) what is the duration of a five year treasury bond with a 10% semi-annual selling at per
periods = 2 x 5 years = 10 periods
par value= $1000
coupon = 10%/2 = 5%
interest = 5% x 1000 = 50
bond = (50 x PVIF 10 periods @ 5%) + (1050 x PVIF10 periods @5%) =
= 47.62 + 952.38 X10 = $9571.42
Price = 952.38 + 47.62 = $1000
period = 9571.42/1000 = 9.57/2 = 4.78

b) duration if the yield to maturity increases to 14% and 16%
1st period interest 14% x 1000 x 1/1+0.14 = 122.81
2nd (140 + 1000 ) x 0.7695 = 877.19
(877.19 x 10 ) + 122.81 = $8894.71
price = 1000
8894.71/1000 = 8.89/2 = 4.4 YEARS

At 16%
1st period interest 16% x 1000 x 1/1+0.16 = 137.93
2nd (160 + 1000 ) x 0.7432 = 862.07
(862.07 x 10 ) + 137.93 = $8758
price = 1000
8758.62/1000 = 8.75/2 = 4.3 years

c) Conclusion
An increase in bond yield to maturity reduces the duration of a bond. This is because an increased yield to maturity increases the cash inflow hence reducing the period of maturity

Problem 37
Duration of zero coupon bond that has eight years to maturity
The duration of a bond with a zero coupon rate is the same its maturity date. Thus the duration of the bond is 8 years
if the duration of maturity increases to 10 years, bo nd duration will be 10 years
if the maturity increases to 12 years, bond duration will be 12 years

Problem 39

a) At 8%
interest = 8% x 10000 = 800
1st 800 x 0.9259 = $740.74
2nd (800 + 10000) x 0.8573 = 9259.26
total = (9259.26 x 5) + 740.74 = $47036.29/10000 = 4.7 years

b) at 10%
interest = 10% x 10000 = 1000
1st 1000 x 0.9091 = $909.10
2nd (1000 + 10000) x 0.8264 = 9090.91
Total = (9090.91 x 5) + 909.1 = $46363.65/10000 = 4.6 years

c) coupon rate 12%
interest = 12% x 10000 = 1200
1st 1200 x 0.8929 = $1071
2nd (1071 + 10000) x 0.7972 = 8825.73
Total = (8825.73 x 5) + 1071= $45199.67/10000 = 4.5 years

Problem 41
At 9.75%
interest = 9.75% x 975 = $95.06

at 9.25%
interest = 9.25% x 995 = $92.04
995/92.04 = 974/95.06 = 10 years

Investment Banks and Financial Institutions

PART 3
Problem 35
a) Coupon rate of 8%
interest = 8% x 1000 = 80
1st 80 x 0.9259 = $74.07
2nd (80 + 1000) x 0.8573 = 925.92
total = (925.92 x 5) + 74.07 = $4703.63/10000 = 4.7 years

b) yield to maturity is 12%
interest = 12% x 1000 = 120
1st 120 x 0.8929 = $107.1
2nd (107.1 + 1000) x 0.7972 = 882.57
Total = (882.57 x 5) + 107.1= $4519.96/1000 = 4.5 years

Yield to maturity is 12.5%
interest = 12.5% x 1000 = 125
1st 125 x 0.8889 = $111.1
2nd (111.1 + 1000) x 0.7901 = 877.91
Total = ( 877.91 x 5) + 111.1= $4500.63/1000 = 4.5 years

Investment Banks and Financial Institutions

PART 4
Problem 37
Duration of zero coupon bond that has seven years to maturity
The duration of a bond with a zero coupon rate is the same its maturity date. Thus the duration of the bond is 7 years
if the duration of maturity increases to 10 years, bo nd duration will be 10 years
if the maturity increases to 12 years, bond duration will be 12 years

PART 5
Repeat problem 39,assuming that the three bonds under consideration have 6 years to maturity.

a) At 8%
interest = 8% x 10000 = 800
1st 800 x 0.9259 = $740.74
2nd (800 + 10000) x 0.8573 = 9259.26
total = (9259.26 x 6) + 740.74 = $56296.3/10000 = 5.6 years

b) at 10%
interest = 10% x 10000 = 1000
1st 1000 x 0.9091 = $909.10
2nd (1000 + 10000) x 0.8264 = 9090.91
Total = (9090.91 x 6) + 909.1 = $55455.37/10000 = 5.5 years

c) coupon rate 12%
interest = 12% x 10000 = 1200
1st 1200 x 0.8929 = $1071
2nd (1071 + 10000) x 0.7972 = 8825.73
Total = (8825.73 x 6) + 1071= $54025.38/10000 =5.4 years

Investment Banks and Financial Institutions

PART 6
Repeat problem 41, assuming that the fair present value rose from $975 to $ 990

duration = 990/9.25 = 10.7 years

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