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Finance and Financial Management Assignment

A Executive Summary

This report includes workings on 4 questions of Finance and Financial


Management assignment

Question 1 was on Capital Expenditure Decision and Investment Criteria. It was


answered with workings of NPV, IRR, and Payback Period of a drug project
under consideration for capital budgeting decision. The assumptions made
were specified and discussed. The resulting NPV of the project was subjected to
Sensitivity Analysis on independent variables, findings interpreted and critical
determinants of NPV were summarized.

Question 2 was on Interpretation of Price-Earnings Ratios. The given share


prices and PE ratios were compared to understand company position and
comparisons were made using PE ratios. Possible reasons for varying PE ratios
between 2 retail chain companies were summarized and explained.

Question 3 was on Portfolio Management. From a given list of securities, a


random selection was made on equally weighted basis to make a portfolio and
analysis of individual and average monthly returns, standard deviation,
covariance and correlation coefficients were calculated using formula and
routine statistical models. Varying number of securities was chosen randomly
to develop equally weighted portfolios of varying number of securities to study
the affect of number of securities on the risk of the portfolio. Results were
summarized and interpreted.

Question 4 was on Options Traded on Stock Market. Profit diagram was drawn
for a call option, call premiums were explained, straddle diagram was drawn
and explained and a comment was made on the contention that options are a
zero sum game for the writer and investor options.

(Word Count 248)

1 Capital Expenditure
Decisions and Investment
Criteria : Bala Chemicals

Page 1 of 68
Finance and Financial Management Assignment

1.1 Capital budgeting decision of Bala Chemicals: Project’s Net


Present Value, Internal Rate of Return, and Payback Period. Key
assumptions and their implications on the analysis.

From the given financial details of the pharmaceutical division of Bala


Chemicals which is ready to introduce a new pain killer designed to
provide relief for muscle injuries incurred as a result of sporting activities,
a product developed through a major research and testing programme,
Income Statement (Table 1.1) and Cash Flow Statement (Table 1.2) were
made and presented in the following pages. From these details, the Net
Present Value (NPV) (Table 1.3), Internal Rate of Return (IRR) (Table 1.4)
and Payback Period (Table 1.5) were calculated and presented in the
following pages.

The Net Cash Flows were found to be £6.05 millions (year 1), £8.52
millions (year 2), £8.52 millions (year 3), £8.52 millions (year 4) and
£10.62 millions (year 5) with an outlay of £13.85 millions at the
beginning of the project (year 0) (Table 1.2).

Net Present Value (NPV) is the difference between the present value of
cash inflows and the present value of cash outflows. NPV is used in
capital budgeting to analyze the profitability of an investment or project.
NPV analysis is sensitive to the reliability of future cash inflows that an
investment or project will yield. A project with positive NPV can be
accepted and with a negative NPV should be rejected (2)

The projects NPV was found to be £ 12.92 millions (Table 1.3) for the 5
years of product life and at a required rate of interest of 16%. This
positive and high NPV value should support project acceptance decision.

Page 2 of 68
Finance and Financial Management Assignment

Table 1.1 Bala Chemicals (Pharmaceutical Division)


Income Statement
Table 1.2 Bala Chemicals
Years (Pharmaceutical Division)
CashPer
Flow
Unit
Statement
0 1 2 3 4 5
(Millions)
Years
Unit Price 5.00 0 1 2 3
Per Unit
Sales (Volumes) (Altered) 3.00 4.00 4.00 4.00 4.00 (Millions)
Operating Activities
Original Sales VolumeCash generated from operations 3.00 4.00 4.00 4.00 15.004.0020.00 20.00
Fixed costs -0.80 -0.80 -0.80
Advertizing costs -0.60 -0.60 -0.60
Sales Revenue Direct costs 15.00 20.00 20.00
1.50 20.00 20.00-6.00
-4.50 -6.00
Working Capital 1.50 0.25 -1.13 -0.38
Cost of Sales (Direct costs) -4.50 -6.00 -6.00 -6.00 -6.00
Working Capital 0.25 -1.13 -0.38
Interest paid
Original Cost of Sales (Direct costs) 1.50 Cost
Advertizing and Marketing -4.50 -6.00 -6.00 -6.00
-1.00 -6.00
Income taxes paid 0.48 -2.68 -4.08 -4.08
Net Cash from Operating Activities -1.65 6.05 8.52 8.52

Investing Activities
Gross Profit Interest received 0.00 10.50 14.00 14.00 14.00 14.00
Original Purchase of porperty, plan and equipment -0.80
Fixed costs -0.80 -0.80 -12.20
-0.80 -0.80
Purchase of intangible assets
Fixed costs (altered) Purchase of a business
-0.80 -0.80 -0.80 -0.80 -0.80
Advertizing costs -0.60
Proceeds from sale of property, plan and equipment -0.60 -0.60 -0.60 -0.60
Advertizing and Marketing Cost Proceeds from disposal of intangible
-1.00 assets
Acquisition of subisidary
Sale of equipment 1.00
Net Cash used in Investing Activities -12.20 0.00 0.00 0.00
Sales of machinary
Operating Profit Financing Activities -1.00 9.10 12.60 12.60 12.60 13.60
Investment Income Issue of ordinary share capital
Purchase of own shares
Finance Costs Dividends paid
New Loans
Depreciation 12.00 -2.40 -2.40 -2.40 -2.40 -2.40
Replayment of loans
Capital gain Increase in bank overdrafts -0.20 Page 3 of 68
Profit before Tax -1.20 6.70 10.20 10.20 10.20 11.20
Net Cash used in Financing Activities 0.00 0.00 0.00 0.00
Tax -0.40 0.48 -2.68 -4.08 -4.08 -4.08 -4.48
Finance and Financial Management Assignment

Table 1.4 Bala Chemicals (Pharmaceutical Division)


Table 1.3 Bala Chemicals (Pharmaceutical Division)
IRR Calculation
NPV Calculation
PVF (48,n) 1.0000 0.6757 0.4565 0.3085 0.2084 0.1408
Years
PV of Cash flows -13.85 4.08 3.89 2.63 1.78 1.50
0 1 2 3 4 5
NPV (48,5) 0.03
(Millions)
Cash Flows -13.85 6.05 8.52 8.52 8.52 10.62
PVF (49,n) 1.0000 0.6711 0.4504 0.3023 0.2029 0.1362
PVF (16,n) 1.0000 0.8621 0.7432 0.6407 0.5523 0.4761
PV of Cash flows -13.85 4.06 3.84 2.58 1.73 1.45
PV
NPVof(49,5)
Cash flows -13.85 5.21 6.33
-0.20 5.46 4.71 5.06
NPV (16,5) 12.92
NPV (48,5) 0.03
NPV (49,5) -0.20
Reduction in NPV 0.23 Page 4 of 68
Increase in % discount 1
Required NPV 0
Finance and Financial Management Assignment

Table 1.5 Bala Chemicals (Pharmaceutical Division)


Payback Calculations
Disc
PVF Present Cumulative Payback Cumulative
Year NCF NCF DCF
Pay
(16%) Value Period Pe
0 -13.85 1.0000 -13.8450 -13.85 -13.85
1 6.05 0.8621 5.2112 -7.80 6.05 -8.63 5
2 8.52 0.7432 6.3317 0.72 8.52 -2.30 6
3 8.52 0.6407 5.4584 9.24 3.16 5
4 8.52 0.5523 4.7055 17.76 7.86
5 10.62 0.4761 5.0563 28.38 12.92

Totals 28.38 12.92

NCF end of 2 years 14.57


NCF end of 3 years 17
Outlay -13.85 -

Excess 0.72 3

1 year 7
Payback Period (Undiscounted) 1 year + [(13.85-6.05)*12) / (8.52) months
months

Page 5 of 68

2 ye
Payback Period (Discounted Payback) 2 year + [(13.85-5.2114-6.3321)*12) / (5.4588) months
Finance and Financial Management Assignment

Internal Rate of Return is the discount rate often used in capital


budgeting that makes the net present value of all cash flows from a
particular project equal to zero. The higher a project's internal rate of
return, the more desirable it is to undertake the project. As such, IRR can
be used to rank several prospective projects a firm is considering.
Assuming all other factors are equal among the various projects, the
project with the highest IRR would probably be considered the best and
undertaken first (3).

The Internal Rate of Return (IRR) was found to be very high at 48.13%
(Table 1.4) demonstrating the high potential of the project as it is 3 times
the required rate of interest, 16%. This is very high IRR and indicates the
growth potential of this project. This project could be accepted bases on
its IRR

Payback is the he length of time required to recover the cost of an


investment (4). It is calculated as [(cost of project) / (annual cash flows)].
All other things being equal, the better investment is the one with the
shorter payback period. Payback ignores any benefits that occur after the
payback period and, therefore, does not measure profitability and also
ignores time value of money. The later limitation can be overcome by
calculating discounted cash flows.

With the given high IRR, the corresponding Payback Period was low at 19
months (1 year 7 months) on undiscounted cash flows and was at 29
months (2 years 5 months) on discounted cash flows (Table 1.5). The
assumption made here was that the cash flows were distributed equally
throughout the year.

The underlying key assumptions for the above analysis were specified
and discussed below:

The basic assumptions inherently and unavoidably common to all NPV


calculations are that 1) the benefits and costs can be identified,
predicted and quantified in financial terms and 2) the appropriate
discount rate for each period can be identified. Other assumptions
include, 3) the discount rate is the actual or implied rate of interest on a
financial instrument, commonly a bank account, 4) the discount rate is
constant over time, 5) tax is not relevant, 6) risk is not relevant, or is
included in the discount rate 7) inflation rates on prices of inputs and
outputs are identical and constant. 8) Productivity growth over time is
zero 9) no borrowings for this project, financed by equity 10) product will
have a life time of 5 years (competitors are developing a better drug),
11) demand for the drug exists for the next 5 years at the forecasted
figures 12) introduction of more effective products into market will
render the current drug unprofitable to market and hence it should be
withdrawn from market end of 5 years, 13) the increase in debtors as a

Page 6 of 68
Finance and Financial Management Assignment

result of introducing the product will just about be offset by the increase
in creditors 14) only 25% of the unit sales expected in the subsequent
year are to he held by the company.

An upward movement of costs considered (direct and fixed costs can


reduce the NPV. Unforeseen inflation and other economical pressures
could induce this movement. A sudden crash in the world economy may
alter the discount rate and thus impacts NPV. A reduction in discount rate
would increase the NPV while an increase in discount rate would tumble
the NPV. Its varying nature could not support a proper calculation of NPV
with assumptions. Tax may be relevant, a shift in taxes will alter cash
flows and hence NPV. The discount rate may not cover unforeseen risk.
Risk can arise from poor market demand, failure of product, consumer
dissatisfaction and complaints, new competitors’ entry etc. Productivity
growth may be significant that could affect the NPV positively or
negatively. Borrowings may alter cash flows and affect the NPV. The drug
under consideration either may last more than 5 years (increased NPV)
due to delayed entry of competitors or shorter than 5 years (reduced
NPV) due to early entry of competitors or other product related
challenges. The increase in debtors as a result of introducing the product
may not just about be offset by the increase in creditors. Increasing
debtors and reducing creditors will show on the working capital cycle
adversely. The forecasted 25% additional requirement may be less or
more. If it is less, there would be loss of sales and it is more, there would
be an increase in stock holding, increase in related costs, possible
increase in debtors, pressure from creditors and unnecessary investment
in stock, possible loss in revenues due to trade discounts to be given to
drive the stock quickly out of factory premises.

Some of these assumptions were obvious due to lack of information. The


above assumptions are justified as in their absence, the NPV calculation
may becomes more complicated and also the resulting NPV may lead to
the risk of opting for sub-optimal investment decisions.

The following costs were not considered in NPV calculation and analysis

 £10 million expenditure incurred on the development of the


product as it was a sunk cost (already incurred)
 £0.3 million annual charge (book charge) toward the production
facility as it is irrelevant

1.2 Use of sensitivity analysis and identification of critical


determinants of the NPV of the proposed investment and
interpretation of results.

Page 7 of 68
Finance and Financial Management Assignment

NPV analysis requires many assumptions and projections, all leading to


one number, the NPV. If some of the projections are not correct then the
NPV would be altered.

Sensitivity Analysis technique is used to determine how different values


of an independent variable will impact a particular dependent variable
under a given set of assumptions (5). It helps us to consider how NPV is
affected by forecasts of key variables. It examines how changes in
underlying assumptions affect NPV using a range of values for annual
revenues, costs, etc. Each variable is examined at a time. It is a way to
predict the outcome of a decision if a situation turns out to be different
compared to the key prediction(s).

Sensitivity Analysis was done for the Bala Chemicals (Pharmaceutical


division) new drug project under consideration. The independent
variables considered to affect the dependant variable (NPV) were 1) sales
volume, 2) direct cost, 3) discount rate, 4) fixed cost and 5) working
capital.
The impact on NPV of a gradual decrease in sales volume was plotted in
Graph 1.1 and presented below. It was found that 1% decrease in sales
volume would bring down NPV by an absolute £0.25 millions (decreased
by 1.95%). When the sales volume was decreased by 51.75%, the NPV of
the project would become Zero.

Graph 1.1 Sensitivity Analysis : Impact of Decreased Sales Volume on NPV


12.00

10.00

8.00
NPV

6.00

4.00
% NPV NPV
Sensitity Parameter
2.00 Decrease Absolute Altered % Change

0.00 10.00% 10.42 -19.35%


10.00% 20.00%
20.00% 30.00% 40.00%
7.93
50.00%
-38.62%
51.75%
% Decrease in Sales Volume
30.00% 5.43 -57.97%
Sales Volume 40.00% 12.92 2.93 -77.32%
Page 8 of 68
50.00% 0.44 -96.59%
51.75% 0.00 -100.00%
Finance and Financial Management Assignment

The impact on NPV of a gradual increase in direct cost was plotted in


Graph 1.2 and presented below. It was found that 1% increase in direct
cost would bring down NPV by an absolute £0.12 millions (decrease by
0.92%). When the direct cost was increased by 110%, the NPV of the
project would become Zero.

Graph 1.2 Sensitivity Analysis : Impact of Increased Direct Cost on NPV


14.00

12.00

10.00

8.00
NPV

6.00

4.00

2.00

0.00
10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 110.00%
% Increase in Direct Cost
NPV NPV
Sensitity Parameter % Increase
Absolute Altered % Change
10.00% 11.74 -9.13%
20.00% 10.57 -18.19%
30.00% 9.40 -27.24%
Direct Cost 40.00% 12.92 8.22 -36.38%
50.00% 7.05 -45.43%
60.00% 5.87 -54.57%
110.00% 0.00 -100.00%

Page 9 of 68
Finance and Financial Management Assignment

The impact on NPV of a gradual increase in discount rate was plotted in


Graph 1.3 and presented below. It was found that 1% increase in
discount rate would bring down NPV by an absolute £0.11 millions
(decrease by 0.85%). When the direct cost was increased by 200.7%, the
NPV of the project would become Zero.

Graph 1.3 Sensitivity Analysis : Impact of Increased Discount Rate on NPV


14.00

12.00

10.00 T
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Page 10 of 68
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Finance and Financial Management Assignment

The impact on NPV of a gradual increase in fixed cost was plotted in


Graph 1.4 and presented below. It was found that 1% increase in fixed
cost would bring down NPV by an absolute £0.01 millions (decrease by
0.10%). When the direct cost was increased by 1233%, the NPV of the
project would become Zero.

Graph 1.4 Sensitivity Analysis : Impact of Increased Fixed Cost on NPV


14.00

12.00

10.00

8.00
NPV

6.00

4.00

2.00

0.00
10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 1233.00%
% Increase in Fixed Cost

Page 11 of 68
Finance and Financial Management Assignment

NPV NPV
Sensitity Parameter % Increase
Absolute Altered % Change
10.00% 12.81 -0.85%
20.00% 12.71 -1.63%
30.00% 12.60 -2.48%
Fixed Cost 40.00% 12.92 12.50 -3.25%
50.00% 12.40 -4.02%
60.00% 12.29 -4.88%
1233.00% 0.00 -100.00%

The impact on NPV of a gradual increase in working capital was plotted in


Graph 1.5 and presented below. It was found that 1% increase in fixed
cost would bring down NPV by an absolute £0.01 millions (decrease by
0.07%). When the direct cost was increased by 1760%, the NPV of the
project would become Zero.

Page 12 of 68
Finance and Financial Management Assignment

Graph 1.5 Sensitivity Analysis : Impact of Increased Working Capital on NPV


14.00

12.00

10.00

8.00
NPV

6.00

4.00

2.00

0.00
10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 1760.00%
% Increase in Working Capital

NPV NPV
Sensitity Parameter % Increase
Absolute Altered % Change
10.00% 12.84 -0.62%
20.00% 12.77 -1.16%
30.00% 12.70 -1.70%
Working Capital 40.00% 12.92 12.62 -2.32%
50.00% 12.55
Page 13 of 68 -2.86%

60.00% 12.48 -3.41%


Finance and Financial Management Assignment

From the above analysis it was observed that the highest influencing
independent variable is decreasing Sales Volume (1.95%). The second
set of influencing independent variables is having just half the impact of
decreasing Sales Volume and includes increasing Direct Cost (0.92%)
and Discount Rate (0.85%). e lowest influencing set of independent
variables is increasing Fixed Cost (0.1%) and Working Capital (0.07%).

% Change in Decrease in NPV Decrease in NPV


Parameter (£ millions) (%)
Decreased by 1%
Sales 0.25 1.95%
Increase by 1%
Direct Cost 0.12 0.92%
Discount Rate 0.11 0.85%
Fixed Cost 0.01 0.10%
Working Capital 0.01 0.07%

Hence, the impact of decreasing sales volumes, increasing direct cost


and discount rate would alter NPV of the project under consideration
significantly. Impact on NPV of a decrease in fixed cost and working
capital on is relatively insignificant. A combined impact of 30% decrease
in sales volume, 30% increase in fixed cost and discount rate would be a
result in a reduction of £10.27 millions in NPV (79.49%)

Page 14 of 68
Finance and Financial Management Assignment

% NPV % NPV
Sensitity Parameter
Increase Absolute Decrease Altered % Change
Sales Volume 12.92 30.00% 2.65 -79.49%
Fixed cost 30.00%
Direct Cost 30.00%
Discount Rate
Working Capital

The graph 1.6 as presented below show the impact of all parameters on
NPV.

Page 15 of 68
Finance and Financial Management Assignment

G r a p h 1 .6 S e n s it iv it y A n a ly s is : I
1 4 .0 0

1 2 .0 0

1 0 .0 0

8 .0 0

6 .0 0
Absolute Change in NPV

4 .0 0

2 .0 0

0 .0 0
- 5 1 . 7 5- 4 0 -2 0 0 20 40 60
% C h a n g e in P a r a m e te r s
Page 16 of 68
S a l e s D i r e c t C oD s i st c o u n t RF iax t ee d C o Ws t o r k i n g C a p i t a l
Finance and Financial Management Assignment

2 Interpretation of Price-
Earnings Ratios

2.1 Comparison of companies based on share prices

Company Share Price Price /Earning Ratio


Sainsbury 372.75 62.1
Tesco 371.25 18.5
Dicom 242.5 28.5
Share
LogicaCMG 158 39.5
price is
determined primarily by book value, liquidation value and market value.
The book value is simply what the company has paid for its assets with a
provision for depreciation (inflation is not considered). Liquidation value
is based on what the company could realize by selling its assets and
repaying debts. It does not measure the value of a going concern. It
ignores intangible assets, (patents, and brand name) and ignores that
firms may be able to make profitable investments in the future because
of their position in the industry (6). Market value is correct if Efficient
Market Hypotheses applies, but managers might have withheld important
information. Published reports can be misleading and fraught with
dangers (Under-valuation of fixed assets, valuation of intangible assets
etc.).

It is often not feasible to make any comparison between companies


simply on the basis of the reported share prices.

If we can imagine the price of share is equal to the present value of


future dividends and the evaluation is done by investor, it is purely a
confidence of the investor in the company and its current returns, future
prospects and anticipated future earnings. Customer confidence differs
from company to company. Most of the times it is based on the past

Page 17 of 68
Finance and Financial Management Assignment

records. Companies with high dividend payout may shoot up their share
prices, at least in the short run, while companies which did not pay
dividends for investing back in to business may still maintain their share
prices high if investor is confident about it growth and possible future
earnings. In reality, the company which paid high dividends did not have
a comparable future growth plan similar to that of the company which
retained most of the earnings. Long term and wise investors will continue
to hold stock of such companies.

Hence, a low share price may indicate either no dividends from the
company because of its poor performance or because it invested back
into business. Similarly, a high share price may indicate either high
dividends being paid either along with a real growth or no growth plan in
the company. A company which paid high dividends, hence, high share
price, may not able to sustain its position if growth plans are not in place.
Similarly, a company which did not pay dividends currently, may have a
decline or less share price (in comparison to the company paying high
dividends) for the time being but in a strong position if growth plans are
in place (with reinvestment of free cash flows) to pay dividends in future.

And also as the time passes, the present value of dividend terms
increases and the present value of the terminal price declines. Share of
established companies are held by investors for cash flows from
dividends. Such shares are also traded high
100%

75%

50%

Although assets, 25%


aggregate equity value
is same for two 0%
companies, the share price 0 1 2 3 4 10 20 50 100

may be different. It may be Price Dividends because of one


firm having fewer shares issued than the other. Those few shares might
be issued even at higher par value and initial subscription price than the
other company. Financing through retention could be another reason, as
mentioned before, paid high dividends and issued more shares to fund its
growth programmes.

Sometimes, company may consciously take up an action to increase the


market share price, of course, which may not stand high at the same for
a long time and if fails to gain investor confidence.

Page 18 of 68
Finance and Financial Management Assignment

Strong stock performance alone doesn't mean the management is of


high quality.

There are several elements that could affect share prices; the accounting
policies, pricing methods, the impact of enterprise objectives, the effects
of competition, the influence of the prospect's perception, characteristics
of product or service, enterprise resources and environmental influences
(7), rumours of war, change in regulatory environment (business),
political climate, interest rate variations, domestic factors, global factors,
company profits, investor confidence, investor perception, supply and
demand (8). There can be many more unknown factors contributing to a
change in share price. It is a complex pattern of various dependent and
independent variables impacting on the share price.

Based on this all


information, it can be
concluded that it is often not
feasible to make any
comparison between
companies simply on the
basis of the reported share
prices.

2.2 Price-earnings ratios,


used with caution, allow
some comparisons to be made across companies.

Dividing the share price by earnings (Price-Earnings Ratio: PE Ratio)


provides a basis for standardising share prices that otherwise can not be
meaningfully compared. PE ratio is one of the market value measures. It
shows how much an investor is willing to pay per pound of reported
earnings (generally based on the last reported earnings). High PE means
high projected earnings in the future. Generally, a high PE is associated
with a low market capitalization rate. A low PE can be due to a low price
(lack of investor confidence) or high earnings.

PE ratios allow some comparison to be made across companies, more


meaningfully for companies in the same industry.

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Reviewing past PE ratios will disclose trends in companies. These can be


compared across
companies.

It is quite common to see a


company which has almost
no earnings will have an
enormous P/E ratio (and a
company which is making a
loss has no P/E ratio).
Generally, it is argued that
stocks with low PE ratios
are undervalued.

There needs to be a caution exercised in interpreting the PE ratios. Some


times, market value measure may be difficult to compare across
companies. It’s usually useful to compare the PE ratios of companies in
the same industry only, or to the market in general, or against the
company’s own historical PE. The earnings per share between firms
arising from the differences in accounting methods will result in
differences in reported price earning ratios. Also the different
depreciation methods used may give rise to differences in PE ratios.
Conservative depreciation policies with high charges would result in
higher PE ratios than those firms using straight line depreciation.
Temporary changes in earnings may affect reported price-earnings ratios
however; they may not lead to a proportionate change in price. Negative
transitory earnings may lead to higher price-earning
ratios and vice-versa. Some firms with temporarily low
earnings will be found to have high price-earning ratios.
As a result, many of the companies with high recorded
price-earning ratios are not growth firms at all but are
firms suffering from transitory earnings set backs.

2.3 Possible reasons why the PE ratios of the


companies listed below differ.

Company Share Price Price /Earning Ratio


Sainsbury 372.75 62.1
Tesco 371.25 18.5
Dicom 242.5 28.5 Page 20 of 68
LogicaCMG 158 39.5
Finance and Financial Management Assignment

Sainsbury and Tesco are supermarket chains in retail trade and basically
a stable business. As a generic rule, stable businesses offer good
dividends. The PE ratio for Sainsbury was the highest (almost 3.4 times
that of Tesco).

The possible reasons for the difference in PE ratios between Sainsbury


and Tesco might be

 High retention of yearly profits by Tesco for growth (more outlets


and diversification). Generally Tesco is more diversified than
Sainsbury and in addition to retail, it covers finance and insurance.
Reviewing the balance sheet of Tesco and Sainsbury it was learnt
that Tesco retained £4,957 millions (2006) and £4,470millions
(2005) while Sainsbury retained only £1,948millions (2006) and
£1,692millions (2005). The net profit for Tesco was £1,576millions
(2006) and £1,347millions (2005). The net profits for Sainsbury was
only £58millions (2006) and £188millions (2005). The net profit
figures and retained profits give more confidence to investor on the
possible future earnings.

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Return was higher than FTSE 100 index and also higher than
Sainsbury over the last 5 yeas.


 \





 Tesco paid increasingly every year for the last 5 years (12.05p
(2002), 13.54p (2003), 15.05p (2004), 17.72p (2005), 17.52p
(2005-1) and 20.20p (2006). Sainsbury paid (19.1p (2002), 23.7p
(2003), 20.7p (2004), 3.5p (2005), 4.1p (2005-1) and 3.8p (2006),
it was erratic.

 The number of shares outstanding for Tesco was more than that of
Sainsbury.

 The high TSR explains the investor confidence in Tesco; the share
price was close to Sainsbury (less only by £1.5 while the PE of
Sainsbury is more than 3.4 times). This clearly shows investor
perception of Tesco and confidence that it would certainly yield
high earnings per share in future.

 The diversification of Tesco also gives more confidence to


investors.

 Earnings are of PE ratio are based on an accounting measure of


earnings that is susceptible to forms of manipulation rendering the
PE only as good as the quality of the underlying earnings number.

 Other reasons for the high PE of Sainsbury might be the accounting


procedures as it depends on accounting profits rather than the
expected cash flows.

 Investors of Sainsbury are willing to pay more per dollar of


earnings in preference to Tesco.

 In EPS we often ignore the capital that is required to generate the


earnings (net income) in its calculation. The company which can
generate same EPS using less equity is more efficient than the

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other. The Tesco is operating with a high equity and also offering
high EPS. Tesco had opted for high gearing (£3,742millions (2006)
and (£4,563millions (2005)) while Sainsbury went for a gearing of
(£2,178 millions (2006) and (£1,793millions (2005)). Low gearing
gives more confidence to investor.

Similarly, the PE ratio of Logical CMG was high 39.5% (1.4 times higher
than Dicom) although its share price was lower 158p (against 242.5p of
Dicom, less by 35%). It again shows the investor perception and
confidence in Logical CMG that it would deliver better earnings per share
in future.

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3 Monthly Returns of
Individual Securities and
construction of Portfolio and
its performance

3.1 Equally weighted Portfolio of five randomly chosen


securities

An equally weighted portfolio was


developed from five (0.2 each) randomly
chosen securities from the given 20
securities. The returns for such portfolio for
each month were calculated with average
Selected P
monthly return and its standard deviation
in the table 3.1 and presented in next 3
pages.

As can be seen from the table 3.1, the


monthly returns of the portfolio ranged
from £-0.0901p to £0.1304 with an average A,B,
of £0.0156 and a standard deviation of
£0.0459.

Po

Deviati
Monthly
M

-0.0901 Page 24 of 68
Mini
0.1304 Max
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3.2 Average returns over 60 months for the chosen individual


securities and their respective standard deviation and
comparison of these figures with that of the equally weighted
portfolio developed using these five individual securities

Monthly returns, average monthly returns with standard deviation over


60 months for the chosen five individual securities were calculated and
presented in the table 3.2 (in the next 3 pages).

Table 3.3 (after Table 3.2 in the following pages) shows the comparison
of the above data for the chosen five individual securities with that of the
developed equally weighted portfolio. The summaries are presented
below;

Average % Change
Individual Standard % Change
Minimum Maximum Range Monthly in Monthly
Securities Deviation in SD
Returns Returns
A -0.0879 0.1777 0.2655 0.0208 0.0595 -25 -23
B -0.2104 0.2814 0.4918 0.0365 0.0939 -57 -51
C -0.1864 0.3274 0.5138 0.0081 0.0957 92 -52
D -0.2849 0.3809 0.6658 0.0120 0.1083 30 -58
E -0.1849 0.1559 0.3408 0.0005 0.0739 2,814 -38

Portfolio -0.0901 0.1304 0.2205 0.0156 0.0459

Security D had registered the greatest variation (highest range (£0.6658)


and a corresponding high standard deviation (£0.1083)) followed by
security C at £0.5138 (range) and £0.957 (standard deviation). The
lowest variation was given by security A (range at £0.2655 and standard
deviation at £0.0595) followed by security E at £0.3408 (range) and
£0.0739 (standard deviation). The variation in B was between the
variation of the groups D and C (high) and A and E (low).

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Average monthly returns were


the highest for security B Average
Individual Standard
(variation was average) followed Range Monthly
by security A (variation was the
Securities Deviation
Returns
lowest) while average monthly
returns were the lowest for Towards
A Lowest Lowest
security E (variation towards Highest
lowest) followed by security C B Average Highest Average
(variation towards highest). The
average returns of security D Towards Towards Towards
C
were in between these extremes. Highest Lowest Highest
The performance of individual
D Highest Average Highest
securities when compared with Towards Towards
the performance of the chosen E Lowest
Lowest Lowest
equally weighted portfolio of
these five securities gives rise to
the fundamental merits of the
portfolio management. Higher
than the
Lower (D)
Firstly, the range and standard Lower and Lower
deviation (risk) of the portfolio Than the Lowest (E) Than the
was significantly reduced to Portfolio
Lowest and Lower Lowest
lower than the lowest risk (A) of
the individual securities, a great (A) to only the (A)
risk management. The Highest
percentage reduction in various securities ranged from 23 (B)toand
58.The
beauty of this reduction is that the highest % reduction in risk (58) was
Higher (A)
achieved in the security with highest individual risk (D). The same trend
could be noticed for the next highest risk securities (C and B). Portfolio
reduces risk exposure of the investor.

Secondly, the returns of the portfolio are reduced. However, it is still


higher than the Lower (D) and Lowest (E). It was lower only to the
Highest (B) and Higher (A). The change in monthly returns ranged from
-57% (B) to 2,814% (E). Interestingly, it is an increase in comparison to 3
of the 5 securities (C, D and E) while it is a decrease in comparison to the
other 2 (A and B). Surprisingly, the A and B were securities with
individual risk rated Lowest and Average, respectively.

In conclusion, a portfolio may reduce the returns to some extent but


definitely and significantly reduces the risk exposure of the investor.

These findings support the Portfolio Theory which states that


“Combining securities in portfolios tends to result in the standard

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deviation of the portfolio return lower that of the weighted average of


the standard deviations of the returns on the securities included in the
portfolio”.

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Table 3.3 Monthly Returns, Average Monthly Returns and Standard Deviation of Chosen 5 Securities in Comparison with the Equally Weighted Portfolio
Individual Security Returns
Selected Portfolio Return
Weighted Contribution in Portfolio
0.2 0.2 0.2 0.2 0.2 1
A B C D E A,B,C,D and E
Sr. No. Date BP - TOT RETURN IND DSG INTERNATIONAL - TOT LONMIN - TOT RETURN IND REUTERS GROUP - TOT SAINSBURY (J) - TOT Portfolio 1
Squared Squared Squared Squared Squared
Deviation Deviation Deviation Deviation Deviation S
Monthly Deviation Monthly Deviation Monthly Deviation Monthly Deviation Monthly Deviation Deviation
from from from from from Monthly D
Returns from Returns from Returns from Returns from Returns from from Mean
Mean Mean Mean Mean Mean fro
Mean Mean Mean Mean Mean
-0.0879 Minimum 0.0000 -0.2104 Minimum 0.0000 -0.1864 Minimum 0.0000 -0.2849 Minimum 0.0000 -0.1849 Minimum 0.0000 -0.0901 Minimum
0.1777 Maximum 0.0246 0.2814 Maximum 0.0610 0.3274 Maximum 0.1020 0.3809 Maximum 0.1360 0.1559 Maximum 0.0344 0.1304 Maximum
Sum Sum Sum Sum Sum Sum Sum Sum Sum Sum Sum
1.2460 0.2124 2.1902 0.5294 0.4858 0.5497 0.7217 0.7040 0.0321 0.3277 0.9352
Security Security Security Security Security
Security Security Security Security Security Portfolio
A B C D E P
A B C D E Average
Average Average Average Average Average A
Average Average Average Average Average Monthly
Monthly Monthly Monthly Monthly Monthly V
Variance Variance Variance Variance Variance Returns
Returns Returns Returns Returns Returns
0.0208 0.0035 0.0365 0.0088 0.0081 0.0092 0.0120 0.0117 0.0005 0.0055 0.0156

Security Security Security Security Security


P
A B C D E
S
Standard Standard Standard Standard Standard
D
Deviation Deviation Deviation Deviation Deviation

0.0595 0.0939 0.0957 0.1083 0.0739

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3.3 Covariance and Correlation Coefficient calculation for each


pair of selected securities and calculation of standard deviation
of portfolio using the relevant portfolio equation and comparison
with the results obtained in 3.1

Covariance and Correlation Coefficients are calculated for each pair of


selected securities and presented in the table 3.4 (in the next page).

The Standard Deviation of portfolio using the relevant portfolio equation


has been calculated as below

Calculation of Standard Deviation of Portfolio using Relevant Equation

Portfolio Variance [Var(Rp)] = [1/N (Average Variance)] + [(1-(1/N)) Average Co Variance]


Portfolio Standard Deviation = Square Root (Portfolio Variance)
From the table 3.4
N = 5.0000
1/N = 0.2000
Average Variance = 0.0077
Average Co-variance = 0.0007
1-1/N = 0.8000

Portfolio Standard Deviation = [0.2 x (0.0077)] +[0.8 x (0.0007)]


= 0.0021

Portfolio Standard Deviation = Square Root [0.2 x (0.0077)] +[0.8 x (0.0007)]


= 0.0459

It can be seen that the Standard Deviation for the Portfolio calculated
using the relevant equation as above and calculated by step by step

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method in Table 3.1 (using Portfolio monthly returns deviation from


monthly average, their squaring to know the variance, average variance
and finally square root of average variance to find out Standard
Deviation) are the same at £0.0459.

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Table 3.4 Covariance and Variance of Indiviual Securities and Their Averages

Individual Securities
DSG
BP - TOT RETURN LONMIN - TOT REUTERS GROUP - SAINSBURY (J) -
INTERNATIONAL -
IND RETURN IND TOT RETURN IND TOT RETURN IND
TOT RETURN IND
Standard Deviation
A B C D E
0.0595 0.0939 0.0957 0.1083 0.0739
Individual
Covariance Between Securities
Securities
A 0.0035 0.0014 0.0020 0.0000 0.0002
B 0.0014 0.0088 0.0005 0.0037 -0.0009
C 0.0020 0.0005 0.0092 0.0004 -0.0004
D 0.0000 0.0037 0.0004 0.0117 0.0002
E 0.0002 -0.0009 -0.0004 0.0002 0.0055
Average Covariance of securities
0.0007
Variance
0.0035 0.0088 0.0092 0.0117 0.0055
Average Variance of securities
0.0077

Individual
Correlation Coefficients Between Securities
Securities
A 1.0000 0.2419 0.3588 -0.0012 0.0371
B 0.2419 1.0000 0.0546 0.3606 -0.1289
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C 0.3588 0.0546 1.0000 0.0402 -0.0631
D -0.0012 0.3606 0.0402 1.0000 0.0276
Finance and Financial Management Assignment

3.4 Choosing securities at random from equally weighted


portfolios of 2, 4, 8, 12 and 20 securities determine the standard
deviation of these portfolios and plot the standard deviations
against the number of securities in the portfolios. Comment on
your results and compare your results with those of the studies
of naïve diversification.

Portfolios of 2 (Table 3.5), 4 (Table 3.6), 8 (Table 3.7), 12 (Table 3.8) and
20 (Table 3.9) were developed and presented in the following pages.

The impact of number of


securities in a portfolio on its Table 3.10 Impact of Number of Securities in
standard deviation is
Portfolio on its Standard Deviation
summarized in Table 3.9 and
plotted in the graph (Fig 3.1).
The graph was plotted for Number of Average Standard
Standard Deviation of equally Portfolio Securities Monthly Deviation
weighted Portfolios for
Included Returns (Risk)
different number of individual
securities chosen randomly. P2 2 0.0286 0.0614
P4 4 0.0175 0.0491
P8 8 0.0162 0.0413
Fig. 3.1 Impact of numberP12
of Securities12in Portfolio Risk on its
0.0167 0.0411
Standard
P20 Deviation (Risk)
20 0.0137 0.0375
0.0700
Portfolio Standard Deviation (Risk)

0.0600

0.0500

0.0400

0.0300

0.0200

0.0100

0.0000
2 4 8 12 20
Number of Securities in Portfolio

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It can be seen from the above Table 3.10 and Fig 3.1, as the number of
the securities included into an equally weighted portfolio, the standard
deviation (SD) of the portfolio has decreased. As the standard deviation
of a portfolio is nothing but risk of the investment, the risk is
considerably reduced as the number of individual securities increased in
a portfolio. This is the essence of portfolio investment to reduce risk.
After certain limit, additional increase in securities may produce either
non-significant or minimal reduction in portfolio standard deviation (risk).
Such minimum risk to be faced for a given portfolio (with reasonably
good number of securities) denotes the undiversible risk. Hence,
increasing number of securities in a portfolio reduces diversiable risk.

It can be seen that along with reduction in risk (SD), the average monthly
returns also reduced as the number of individual securities increased in a
equally weighted portfolio. This might be because of a lesser contribution
of a each individual security in a portfolio with more number of securities
in comparison to a portfolio with less number of securities. A high risk
high risk individual security can affect more an equally weighted portfolio
with a few number of securities rather than the portfolio with more
number of securities.

The negative correlation between A and D, B and E, and C and E might


have contributed to reduction in risk in portfolios where they were
constituents. They also might compensate for some losses in monthly
income.

The selection of the securities was purely at random and strictly not on
any past, present or future information about the companies, not based
on any financial understanding of their investments, decisions,
management, not based on market trends, competition and many other
factors which could either shoot up or trumpet the share prices in the
future, in the present or in the past. The selection was not even done
looking at the monthly averages. A purely random selection of such kind
can be compared with a naïve diversification, choosing securities with no
much information and expertise. Although, such naïve diversification was
used to build a portfolio, it perfectly worked out to reduce the risk that
would otherwise be faced with less number of the same securities. It
supports the age-old adage “Don’t keep all your eggs in one basket”. A

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learned decision might further reduce risk and increase earnings from a
professionally diversified portfolio.

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Table 3.10 Impact of Number of Securities in


Portfolio on its Standard Deviation

Number of Average Standard


Portfolio Securities Monthly Deviation
Included Returns (Risk)
P2 2 0.0286 0.0614
P4 4 0.0175 0.0491
P8 8 0.0162 0.0413
P12 12 0.0167 0.0411
P20 20 0.0137 0.0375 Page 53 of 68
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Fig. 3.1 Impact of number of Securities in Portfolio Risk on its


Standard Deviation (Risk)

0.0700
Portfolio Standard Deviation (Risk)

0.0600

0.0500

0.0400

0.0300

0.0200

0.0100

0.0000
2 4 8 12 20
Number of Securities in Portfolio

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4 Trading of Marks and


Spencer’s Shares

4.1 Profit Diagram for a Call Option

The profit diagram for the call option with a 600p exercise price that
expires in October was given in the next page.

The X-axis represents the stock price on the expiration day and Y-axis
represents profits or losses on the expiration day. This diagram ignores
any commissions that are to be paid as part of this call option.

The Call was made at an Exercise Price of 600p to be expired in


October for a Call Price or Premium of 28.75p per share.

As the share price rises above the Exercise Price by the expiry of the call
(October in this diagram), the premium paid on this call option will be
slowly recovered by the investor. The Call Price paid (28.75p) will be
recovered when the share price is rised to 628.75p by expiry of the call
in which case the investor would just recover his cost (ignoring the
discounting factors over the period on the initial outlay) and would not
make any profit resulting in a state of Break-even.

Any further rise in share prices would start yielding profits to investor
through this option as he should otherwise end up paying a higher price
to acquire the same asset if he were not exercising this option. As seen
in the diagram, the potential profit line is at 450 to X-axis, showing a
strong relationship of Profits to Increasing Share Prices. It can be seen
that for every 1p increase in the share price from Exercise Price the
corresponding profit is also increased by 1p. For example, as shown in
the diagram, when the share price rises to 700p from the exercise price
of 600p (an increase of 100p) by the maturity of call then the profit for
investor would rise from -28.75p (at Exercise Price) to 71.25p (an
increase of 100p). These profits can be realized once the investor
exercises this option and sells the shares in the shares in the market at
the prevailing rates as shown in the diagram.

The call price denotes the maximum possible loss from this call. The
investor may opt to get the option expired if the share price is
trumpeting below 600p end of October thus minimising his ‘downside’
risk to a maximum of 28.75p per share (the call price). Thus, Share Prices
below the Exercise Price were not shown many in the diagram as they
have no greater impact on the loss beyond the share price.

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Chart 1. Profit diagram for a call option of 600 pence exercise price
expiring in October on Marks & Spencer's Shares
Profit of 71.25p
when share
80 Exercise Price Break-even price is 700p
600p Price 628.75p
70

60

50

40

30
Profit / Loss

20

10

0
580 590 600 610 620 630 640 650 660 670 680 690 700
-10
Call Price / Premium
-20
28.75 p
-30

-40
Share Price (pence)

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4.2 December Calls Trading higher than the October Calls

From the given Call Option


data, the October Calls are Share Exercise Calls
traded at 28.75p per share Price Price
while December Calls are Oct Nov Dec
traded at 37.25p. 600 28.75 34.25 37.25
618.5
650 5.5 9.75 13
It is quite common that Calls
for longer period are traded at high Call Price or Premiums than the Calls
for shorter period. It can be seen from the calls values in the above table,
December higher than November and November higher than October.
The longer the period the higher the share option price.

The inherent provision of a Call Option is protecting investors from


‘Downside’ risk. If an investor has bought a Call Option, he would only
and only exercise it when the share prices are at least equal or above the
exercise price end of the period he had purchased the option for. In this
scenario, he would either just recover his initial outlay (when the share
price is just equal to Exercise Price + Share Premium) or make profits
equal in pence of rise in share price from the Exercise Price. On the flip
side, when the share price trumpeted below the Exercise Price, the
investor would prefer not to exercise the option and have it expired. By
doing so, the investor is limiting his losses, thus risk. Hence, the Call
Option provides a much sought after provision by investors to limit
‘downside’ risk while keeping the option open for unlimited ‘upward’
profits in rising market.

The level of premiums being related to the length of period could be


justifiable for the a few reasons. Firstly, the behaviour of all elements
that could affect share prices can relatively be easily predictable in near
future than for the further period. The uncertainty over a longer period
could affect share prices either positively or negatively stronger than for
shorter periods. As the investor is protected in call option against the
downside risk, there is high probability that he would make additional
profits (which can be unlimited) at a pre planned and prepared premium
price. Hence, there are more chances of positive results and this justifies
charging a high premium and also attractive to investor who can go for
an additional risk expecting relatively higher returns. Secondly, a long
period call option gives the investor some time to see the performance of
the share in the market and he can take a suitable decision either to
exercise the call or not having clearly seen and understood its
performance, the additional premium is charged for this provision.
Thirdly, the relative time value of money justifies high premium for
longer periods (the December premium discounted back at 10% per
annum (in monthly interest payments) to October would be 23.6p only).

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4.3 Diagram illustrating a straddle, using calls and puts


expiring in November and an exercise price of 650.

Share Exercise Calls Puts


Price Price
Oct Nov Dec Oct Nov Dec
600 28.75 34.25 37.25 7.75 13.75 16.75
618.5
650 5.5 9.75 13 34.5 40.5 43.75

The straddle diagram using calls (9.75p) and puts (40.5p) expiring in
November at an exercise price of 650p is drawn and presented in the
next page.

It was seen that when the straddle was opted at a total premium of
50.25p at a strike price of 650p, the break-even points were found on
either side of share movements (at 599.75p on the downside and at
700.25p on the upward)

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Recovery of premium paid and subsequent profits were generated from


movement in share price either on downside or on upward. The higher
the variation from the strike prices the higher the profits from the
straddle strategy.

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Chart 2. Straddle with calls and puts expiring in November at an exercise price of
650p for Marks & Spencer's Shares

80
Puts Calls

60

40
Profit of 19.75p when share Payoff / Share Value Profit of 19.75p when shar
price is either 580p or 720p at the expiry of straddle price is either 580p or 720
Profit / Loss

20
Strike Price
Break-even 600p Break-even
Price 599.75p Price 700.25p
0
580 590 600 610 620 630 640 650 660 670 680 690 700 710 72

-20
Profit / Loss

-40
Call and Put Price / Premium 50.25p

-60
Share Price (pence) Page 61 of 68
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4.4 Explain why an investor might consider it worthwhile to


invest in a straddle.

An investor might consider


investing in a straddle worthwhile
only when he believes share prices
will significantly move but unsure as
to which direction.

The main attraction to the investor


is the essence of straddle where he
makes profits when shares move either upward or downside. This option
is better than a single strategy of either call or put when investor is
unsure of the movement in shares but very confident it is going to
happen. This gives him better option of limiting his loss to the extent of
the premium he paid in establishing the straddle position. However, it
entirely depends on the volatility in the future. Investor may consider
straddle during periods of falling share prices or abrupt and quick rise in
share prices.

Investor also considers straddle to minimize risk from significant


movement of share prices in unexpected direction. Risk and reward and
inextricably linked in straddles. On the flip side of it, straddle can even be
risky to perform as well. For investor to make profits, the stock price
must move significantly. A slight movement in share prices (less than the
premium investor did outlay) may result in a loss to the investor. And
also the premium for stocks that are expected to move significantly will
be at a higher level. A high level premium stretches the break-even and
comparatively reduces the payoff if the share prices move significantly.
The short straddle is a very risky strategy an investor uses when he
believes that a stock's price will not move up or down significantly. It is
associated with unlimited amount of risk with a large move downside or
upward.

In general, investor prefers straddle while dealing with a share whose


movement is unpredictable as he could reduce risk (although this
strategy is not just a risk-management strategy), gain insights into the
performance of the share over a period (time leverage to decide whether
to have this particular share in his portfolio) and get income streams
which are otherwise not possible, more convenient and less expensive
than wholesale purchase or sale of shares,

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Finance and Financial Management Assignment

4.5 Comment on the contention that options are a zero sum


game for the writer and investor in options.

Zero Sum Game means a situation in which total gains equal total losses.
The following diagram shows the Zero Sum Game in detail. It shows the
four basic options positions, namely the call option (long and short) and
the put option (again long and short). The net position of all these four
positions is a Zero Sum Game.

The aggregate gains and losses will always net to zero. The most an
option writer can make is the option premium which is paid by the option
holder. Since the premium is paid by option holder and received by
option writer, the break-even point occurs at the same share price point.
A potential gain realized by option holder by end of the option maturity is
just equal to the loss of born by the option writer for the altered share
price.

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Finance and Financial Management Assignment

Chart 3. Options are a Zero Sum game for the writer and investor in options

100
Profit of 80p when share
price is 700p to call holder
80
Profit of 40p
when share
60 price is 580p Exercise Price Break-even
to put holder 600p Price 620p
40
Call Price / Premium 20p received by call writer Put Price / Premium 20p received by put writer
20
Profit / Loss

0
580 590 600 610 620 630 640 650 660 670 680 690 700
-20
Call Price / Premium 20p paid by call holder Put Price / Premium 20p paid by put holder
-40
Loss of 40p
when share
-60
price is 580p
to put writer
-80
Loss of 80p when share price
is 700p to call writer
-100
Share Price (pence)

The demerit of this contention is its Ignorance of the commissions, taxes


and with an assumption that all both buyer and seller will have the same
ability to borrow and lend money in market at the same (risk free)
interest, the options market is a zero sum game. The commissions may
not be the same. Lower profits may demand a minimum slab which will
increase the net percentage value of commission of the gross profit
made. All earnings attract taxes; it can be significant if the profits are
high. A loss in contrary may help to reduce some taxes otherwise are
applicable on individual earnings. It is rather never true that both the
lending and borrowing rates are same. Option investor takes the brunt of
cost of capital and writer can invest his premium to generate additional
cash flows.

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Finance and Financial Management Assignment

Having described the above exceptions, still this Zero Sum Game holds
true to some extent and especially when the market is not perturbed by
unprecedented and unpredicted rises and falls.

(Word Count 6,302)

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Finance and Financial Management Assignment

5 References

1 http://cyllene.uwa.edu.au/~dpannell/dp0405.htm

2 http://www.investopedia.com/terms/n/npv.asp

3 http://www.investopedia.com/terms/i/irr.asp

4 http://www.investopedia.com/terms/p/paybackperiod.asp

5 http://www.investopedia.com/terms/s/sensitivityanalysis.asp

6 http://pages.stern.nyu.edu/~kjohn/courses/session01.ppt#270,6,Valuing
an Office Building

7 http://www.businessplans.org/Pricing.html

8 http://www.moneybiz.co.za/personal_finance/jse_6.asp

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Finance and Financial Management Assignment

6 Appendix

Appendix
Financial Statements of Tesco
I

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Finance and Financial Management Assignment

Appendix
Financial Statements of Sainsbury
II

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