Finance assignment.docx

Finance assignment.docx

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Financeassignment

Question1

OrdinaryShares

AnexampleofacompanythatissuesordinaryshareisBHPBillitonLimited（BHP）,whichcanbepurchasedontheAustralianSecuritiesExchange（AustralianSecuritiesExchange,2011）.ThecodeofthecompanyisBHPontheASX,whichcanberetrievedonthewebsite.BHPBillitonLimitedisaglobalresourcescompanythatspecializesonmaterialssuchasaluminum,basemetals,diamondsandspecialtyproducts,energycoal,ironore,manganese,metallurgicalcoal,petroleum,stainlesssteelmaterialsanduranium.Thecompanywasfoundedin1885andisheadquarteredinMelbourne,Australia.

PreferenceShares

AnexampleofacompanythatissuespreferenceshareisCommonwealthBankofAustralia,whichcanbepurchasedontheAustralianSecuritiesExchange（AustralianSecuritiesExchange,2011）.ThecodeofthecompanyisCBAontheASXwhichcanberetrievedonthewebsite.CommonwealthBankofAustraliaisalargebankingandinsurancecompanythatspecializesinfunding,superannuation,insurance,investment,retail,businessandbrokingservices.ItisthesecondlargestAustralianlistedcompanyontheAustralianSecuritiesExchange.

ConvertibleNotes

AnexampleofacompanythatissuesconvertiblenoteisAdvanceEnergyLimited,whichcanbepurchasedontheAustralianSecuritiesExchange（AustralianFinancialReview,2011）.ThecodeofthecompanyisAVDwhichcanberetrievedonthewebsite.AdvanceEnergyLimited（AVD）isanoilandgasexplorationcompany.ThecompanyfocusesonacquiringanddevelopingoilandgasproducingassetsinUSA.Thecompany'sinitialportfolioincludesproducingassetswithidentifiedexplorationupsidelocatedinTexas,USA（InvestSmart,2011）.

Rights

AnexampleofacompanythatissuesrightsisNewHopeCorp,whichcanbepurchasedontheAustralianSecuritiesExchange（AustralianFinancialReview,2011,p25）.ThecodeofthecompanyisNHContheASXwhichcanberetrievedonthewebsite.NewHopeCorporationLimited（NHC）producescoalfortheinternationalanddomesticthermalcoalmarketsfromtheNewAclandandNewOakLeighminesbasedinSouthEastQueensland.NHCismajorityownedbySoulPattersonandalsohasaninterestinacoalshippingportoperator（InvestSmart,2011）.

HybridSecurities

Hybridsecuritiesconsistoftwodifferentinvestments,whichhavebothcharacteristicsofdebtandequity.Thistypeofsecuritypaysfixeddividendstotheshareholdersuntilthematuritydate（Choudry,M.2010,p119）.Inthiscase,companiesthatissuesconvertiblenotesandpreferenceshares.AnexampleofacompanythatissuesahybridsecurityisEldersHybrid,whichcanbepurchasedontheAustralianSecuritiesExchange（AustralianFinancialReview,2011）.ThecodeofthecompanyisELDPAontheASXwhichcanberetrievedonthewebsite.EldersHybridisalargecompanythatcarriesoutanumberofenterprisesincludingruralservices,forestryandautomotive.

Question2

Ordinaryshare

AccordingtoAustralianSecuritiesExchange,anordinarysharerepresentsownershipofashareholder.Thisentitlesrightsforshareholderstovoteformattersinvolvingthecompanyinproportiontothepercentageoftheirshareownership（Gitmanet.al.2004,citedinCarrington&McNaught,2010,p136）.Theincomereceivedbyashareholderisknownasdividends.Theamountofdividendpaidtoaninvestormayvaryeachtimeasthepriceofsharefluctuates.Aninvestorofanordinaryshareisknowntobeultimatebearersofrisk;thehighertherisksthegreaterthereturns（Peirsonetal.2000,p255）.Withthisreasoning,ordinarysharesaresaidtobemorepopularascomparedtoothersecuritiesastheyofferattractivereturns.Otherthanthat,informationregardingthesesharesiseasilyaccessiblethroughthenewsandfinancialmedia.AccordingtoGitmanet.al.（2004,citedinCarrington&McNaught,2010,p136）,ordinarysharesremainasoutstandingindefinitelyastheydonothaveamaturitydate.

Preferenceshare

Apreferencesharealsorepresentspartialownershipofashareholderinacompany.Unlikeordinaryshares,preferredshareholdersdonotbenefitfromanyvotingrights.Preferencesharepaysafixedamountofmoneytotheirshareholders,alsoknownasdividends,howeverthesepaymentsdonotfluctuate（Gitmanet.al.2004,citedinCarrington&McNaught,2010,p110）.Companiesarenotrequiredtopaytheirpreferenceshareholdersiftheylackthefinancialabilitytodoso;thiscausestheoffertobelessattractiveascomparedtoordinaryshares.However,anadvantageofpreferenceshareisthatintheeventofabankruptcy,shareholdersarethefirsttobecompensatedbeforeordinaryshareholders.AccordingtoGitmanet.al.（2004,citedinCarrington&McNaught,2010,p110）,thistypeofinvestmentdonohaveamaturitydate.

Convertiblenotes

Convertiblenoteisadebtinstrumentthatisabletoconvertfromdebttosharesinacompany（Gitmanet.al.2004,citedinCarrington&McNaught,2010,p110）.Generally,largecompaniesusethisinstrumenttoincreasefundsforthedevelopmentoftheircompany（AustralianSecuritiesExchange）.Duetothepopularityofsharesinthemarket,managementsofthesecompaniesexpectcreditorswillultimatelyconvertthedebtsintoshares.Therefore,norepaymentwillberequired.Theconversionofnotesbecomesattractivewhenthereisariseabovetheconversionpriceofthenotestoshares.

Rights

Rightsinbusinessfinanceistheprivilegegiventopreliminaryshareholdersofacompanytosubscribetoanewshareofthecommonstock,beforeitisofferedtothepublic（Gitmanet.al.2004,citedinCarrington&McNaught,2010,p136）.Inshort,itistheissueofnewsharestoexistingshareholdersinproportiontotheirexistingholdings（Gitmanet.al.2004,citedinCarrington&McNaught,2010,p137）.Thismeansthatrightareissuedbyacompanytoincreasefundsforthecompany’sactivities;henceissuedtoshareholderstomaintainthevalueofpercentageinthecompany,avoidingdilutionofownershipsandvotingrights.

Question3

Thereisachancethatinvestorsmightlosetheirentireinvestmentinallfoursecurities.Infinance,therearetwobasicconceptsofinvestment:

riskandreturn.Expectedreturnandrisksareinterrelated;thegreatertherisk,thegreatertheexpectedreturnwillbe（Peirsonetal.2000,p255）.Thismeansthatineveryinvestment,itbearsrisks.

Inanunfortunateeventofabankruptcy,acompanymustfirstreimbursetheconvertiblenoteholders,astheyaregiventheprioritytoberepaidbeforeanyothershareholdersanddebt（Hackett2010）.However,theamountofdebtpaidbacktothenoteholdersmaybedifferbasedonthevalueofassetsremaininginthecompanyandtheavailablefundsremainedinthecompany.Acompanymustthencompensatetheirpreferenceshareholdersafterpayingoffthedebtholder.Thisisduetothefactthatpreferenceshareholdershavetheprivilegetobereimbursedpriortotheholdersofordinaryshares（Redhead2008,p129）.

Rightsissueofaninvestorcomprisesofamaturitydate.Eachinvestorisgivenaperiodoftimetoeitherbuynewcommonsharesissuedbythecompany,ortoselltheirrightstopotentialinvestorsinthemarket.Theserightswillbeineffectiveonceitexceedsthematuritydate,unlessinvestorsexerciseit.However,basedontheeventofbankruptcy,rightissuesmightnothavevalueiftheholdertriestosellitoffinthemarket,ascompanywillbesackedofffromtheAustralianStockExchange.Thecompany’sbankruptcywillbeeliminatedfromthestockmarket,whichmeansthestockhasnovalueandinvestorwillnotbewillingtobuytheshares,asthereisnopotentialgrowthaswellasreturnontheinvestment.

Anexampleofthesituationwillbe:

ifCompanyAfilesforbankruptcyduetonon-sufficientcashflowinthecompany,theassetsofthecompanywillbeevaluatedbasedonthemarketvalue.Company’sassetsuchasbuilding,land,stocksandvehiclewillbevaluedatmarketvalue,$400,000.Liabilitysuchasconvertiblenotes,preferencesharesandordinarysharehasvalueof$300,000,$200,000and$500,000,respectively.Fromtheprioritylistmentionedabove,companywillbeabletopayoffthe$300,000worthofconvertiblenotes,remainingof$100,000willbepaidtopreferenceshareholders.Consequently,theCompanyAwillhavepaidofftheprincipalamounttotheconvertiblenoteholders,preferenceshareholderaretoreceivehalfoftheamountinvestedandordinaryshareholderwillnotbecompensatedbyCompanyA.

Question4

Themainfactorsthatinfluenceinvestorsinchoosingasuitableinvestmentareasfollowed:

Risktolerance–Risktoleranceistheextentthatinvestoriswillingtoadoptinregardstoinvestmentdecision-making.

Return–Returnistheincomegainedfromaninvestment.

TaxBenefits-TaxBenefitsistheamountofmoneythataninvestorcanoffsetthetaxableincomefromthefrankeddividendandtheimputationcredit.

Liquidity–Liquidityisthecapabilityofconversionofanassetintocashinashortamountoftimewithnocomplicationsandlosses.

Asaninvestor,mychoiceofinvestmentwouldbeRightsandConvertibleNotes.Withonly$5000AustralianDollarstoinvestinsecurities,myfinancialgoalwouldbetomaximizetheflowofincomewithminimumrisk.Inmyopinion,aswellastakingthefactorsinfluencinganinvestmentdecision-making,rightissuesisbestsuitedforshort-terminvestorstomakeprofitortoavoidlossesduetothefactthatinvestorshavetheprivilegetopurchasenewcommonsharesforadiscountedprice.Withrightsissues,aninvestorwouldbeabletoresellthesesharesatmarketpricetoneworexistingshareholders.Therefore,investorsaregiventheopportunityf