Corpfin 7101 Managerial Finance : Assessment Answers

Answer:

Introduction 

This report contains various methods and investment methods which could be used by venture capitalist in its investment functioning. In this report hedge fund has been developed by the troy Dexter who is an affluent venture capitalist in Sydney. This hedge fund has been developed by Troy with a view to create value on the invested amount. In addition to this, investment has been made by troy through its hedge funds in various direct and indirect securities. Hedge funds are used to invest in diverse range of assets and deploy a variety of investment strategies to maintain hedged portfolio which is used to protect the investor’s fund from downturn in the market (Aiken, et al. 2016).

Troy Dexter who is an affluent venture capitalist in Sydney has founded a hedge fund named Northwest capital management. This is newly developed hedge fund which is designed to invest funds with an aim to deliver positive return on money invested while minimizing risk. This Northwest capital management is company which is mainly incorporate to minimize the risk associated in investment securities and optimizing returns. In addition to this, company apart from investing its money in hedge funds, it is also open for other investors to invest their money in Northwest capital management for adopting hedging technique (Kitsul and Ochoa, 2016).

Treasury bonds- These are the government securities which are having zero level of risk. However, at the same time return provided by these bonds are also very low as compare to other market return.

Energy stock- These are the private securities which have high risk and high return. The risk and return on these securities will depends upon the internal and external factors of the company which has issued these stocks (Parwada Rui, and Shen, 2016).

Troy has incorporated a hedge fund named Northwest capital management for hedging all the possible risks such as sluggish business conditions, low growth in market and increment in inflation rate (Cao Chen, Goetzmann and Liang, 2016).

Direct or indirect securities

Financial market is consisted of various securities and scriptures which are used by investors to create value on their investments. Hedge funds are used to handling risks and increasing return on the invested amount. It is evaluated that purpose of investment and the way which have been used for investment in securities helps investors to determine whether money invested in particular securities are direct securities or indirect securities. For example, buying the stock or securities by name or buying share in company directly through brokers or sub broker is called direct securities. On the other hand, if investors invest their money in buying mutual funds is an indirect investment (Song, 2016).

Direct securities- These are the securities or scriptures which are undertaken for the investment purpose by investors on their own. These are the securities purchased by investors with their own name without taking any other external entity helps. It is observed that in this securities plan some time it becomes hard for the investors to prepare strategies to hedge risks. In this given case study, investment made by Northwest capital management in buying different securities would be considered direct securities (Robison, Barry & Myers, 2015).

Indirect securities- These are the securities in which amount of investment in made by hedge funds or hedge fund Company on the behalf of investors. These type of investment strategies are adopted by investors with a view to hedge associated risks on the particular scriptures. Investors considers that experts in hedge funds may provide extra return on their investment money if they invest their money in the securities as they deem fit

Northwest capital management is the hedge fund company which is developed with a view to invest its own money and other funds which are given by other investors on the basis of annual management fees. In this case study, it could be inferred that from the point of view of Northwest capital management all the money invested in treasure bonds and energy stocks are direct securities. In order to justify whether these securities direct or not, example could be inserted. For instance, if investor is buying some securities in company or portfolio then these securities would be direct securities for those investors. On the other hand, if the same investors given its money in some kind of hedge fund for investment purpose then securities bought by that hedge fund will be considered indirect securities for the investors while, same securities would be considered direct securities for the same hedge fund which invested money in buying securities (Moran, 2016).

Therefore, now in the end it would be concluded that Treasury bond securities and energy stock would be considered as direct securities from the point of view of Northwest capital management.

Northwest capital management is hedge fund which is used to invest money on the behalf of investors in particular securities for creating value on the invested capital and hedging funds. Troy has incorporated this hedge fund for hedging all the possible risks which may result into destruction of value of invested amount. It is evaluated that Northwest capital management is accompanied with several experts and advisors who could make effective level of investment in particular securities. In this given case study, it is given that investors are always worried about their investment. They are worried whether the invested amount would increase the value of their investment. It is evaluated that Ms. Investor has invested her money in Northwest capital management with a view to create value on its investment. After that, that Northwest capital management invests all its money along with its own funds in treasury bonds and energy stocks. These stocks have been made with a view to hedge all the possible risks and uncertain events with a view to create value on the invested amount. Northwest capital management has invested all its funds and investors money in share market with its name.

Direct securities- These are the securities which are bought by the investors with their own name. In the give case, Northwest capital management invested all its money treasury bonds and energy stocks traded in share market with its own name. Therefore, all the money invested in treasury bonds and energy stocks in the share market by Northwest capital management would be considered direct securities.

Indirect securities- These indirect securities case could be defined with the help of example. For instance, if investors instead of investing their money directly in funds and share market go for investing money in mutual funds. After that that mutual funds invest the same amount on the behalf of those investors in particular securities then these securities would be considered as indirect securities.

In the given case, it would be considered that Northwest capital management is the hedge fund which is investing its money in various securities in share market. From the point of view of Northwest capital management these securities would be considered as direct securities. On the other hand, from the point of view of investors who invested their money in Northwest capital management would be considered direct securities.

After evaluating all the facts and case study, it is considered that from the point of view of investors, invested money in treasury bonds and energy stocks by Northwest capital management are indirect securities. On the other hand, the same securities are indirect securities for Northwest capital management (Adusumilli, Davis and Fromme, 2016).

This report contains various factors and issues for deciding whether the invested amount is direct securities or indirect securities. The hedge funds have been developed by Troy with a view to create value on the invested amount. In addition to this, investment has been made by troy through its hedge funds in various direct and indirect securities with a view to hedge all the possible risks. Now in the end, it would be inferred that investment made by Northwest capital management in securities are direct securities from their point of view while, on the other hand, from the point of view of investors who invest their money in hedge fund would consider these securities as indirect securities (Baginski & Hinson, 2016).

In this report capital budgeting tools have been used to identify which one of the lathes is more beneficial for Norwich tool. It is evaluated that if Norwich tool large lathe machine shops adopt these lathe machines then it would increase the overall productivity of shop (Rad, et al. 2016).

Payback period- This period will reflects the time period which would be required for collecting all the cash outflow. It is evaluated that Lathe-1 is having less payback period of 2.31 years which will be used to cover up all the initial investment. (Lettau &Ludvigson, 2011).

Lathe-A

(Blidaru, &Blidaru, 2015)

Therefore, by considering the payback period it could be inferred that Norwich Tool should consider only Lathe- A for its investment proposal (Drobetz &Merikas, 2013).

 (McCarthy, 2016).

Computation of Lathe-B

NPV= It is the amount of difference between present value of cash inflow and present value of cash outflow (Blackall, Sykes, Telford and Baker, 2016).

NPV= P.V. of cash inflow- P.V. of cash outflow

IRR- This is the at least required rate of return which should be earned by company from its investment.

By considering NPV and IRR of both projects, it is evaluated that Norwich Tool shop should accept Lathe B in its business functioning (Easley &O’Hara, 2014).

In this case Norwich Tool shop should adopt Lathe-2 as it is offering high return but the payback period is also high. It is observed that when company is having unlimited funds then it could compensate its long payback period (Klingler, 2016).

When there is capital rationing

In this case,Norwich Tool would go for Lathe-A. This has shorter pay- back period. However, the NPV and IRR is also satisfactory but less than Lathe B (Guermat, 2014).

References

Adusumilli, N., Davis, S. and Fromme, D., (2016). Economic evaluation of using surge valves in furrow irrigation of row crops in Louisiana: A net present value approach. Agricultural Water Management, 174, pp.61-65.

Aiken, A.L., Clifford, C.P., Ellis, J.A. and Huang, Q., (2016). Funding Liquidity Risk and the Dynamics of Hedge Fund Lockups.

Baginski, S. P., & Hinson, L. A. (2016). Cost of capital free-riders. The Accounting Review, 91(5), 1291-1313. doi:10.2308/accr-51379

Blackall, D., Sykes, J., Telford, J. and Baker, C., (2016). Trio hedge funds: Government regulators and the public's right to know. Precedent (Sydney, NSW), (134), p.33.

Blidaru, G., &Blidaru, D. M. (2015). Financial management verification - occurrence - development, objectives. ValahianJournal of Economic Studies, 6(4), 107.

Cao, C., Chen, Y., Goetzmann, W.N. and Liang, B., 2016. The role of hedge funds in the security price formation process.

Drobetz, W., &Merikas, A. G. (2013). Maritime financial management. Transportation Research Part E: Logistics and Transportation Review, 52, 1-2. doi:10.1016/j.tre.2012.11.005

Easley, D., &O'hara, M. (2014). Information and the cost of capital. The Journal of Finance, 59(4), 1553-1583. doi:10.1111/j.1540-6261.2004.00672.x

Guermat, C. (2014). Yes, the CAPM is testable. Journal of Banking & Finance, 46, 31-42. doi:10.1016/j.jbankfin.2014.05.001

Kitsul, Y. and Ochoa, M., (2016). Funding Liquidity Risk and the Cross-section of MBS Returns.

Klingler, S., (2016). High Funding Risk, Low Return. Browser Download This Paper.

Lettau, M., &Ludvigson, S. (2011). Resurrecting the (C)CAPM: A Cross?Sectional test when risk premia are Time?Varying. Journal of Political Economy, 109(6), 1238-1287. doi:10.1086/323282

McCarthy, S., 2016. Magic Timber and Steel: Investment Evaluation with Net Present Value.

Moran, A. (2016). The financial management of agile projects. Itnow, 58(3), 60-61. doi:10.1093/itnow/bww086

Neslihanoglu, S., Sogiakas, V., McColl, J. H., & Lee, D. (2016). Nonlinearities in the CAPM: Evidence from developed and emerging markets: Nonlinearities in the CAPM. Journal of Forecasting, , n/a. doi:10.1002/for.2389

Parwada, J.T., Rui, Y. and Shen, J., (2016). Hedge Fund Ownership, Funding Liquidity Constraints and Excess Return Co-Movement.

Rad, M.S., Jamili, A., Tavakkoli-Moghaddam, R. and Paknahad, M., (2016) January. Resource Constraint Project Scheduling to meet Net Present Value and quality objectives of the program. In Industrial Engineering (ICIE), 2016 12th International Conference on (pp. 58-62). IEEE.

Robison, L. J., Barry, P. J., & Myers, R. J. (2015). Consistent IRR and NPV rankings. Agricultural Finance Review, 75(4), 499-513. doi:10.1108/AFR-06-2015-002

Song, Y., (2016). Dealer Funding Costs: Implications for the Term Structure of Dividend Risk Premia. Browser Download This Paper.