Answer 1: Direct and Indirect Securities Concept
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2. Requirements for both case studies in Assessment 2
Please present the answers of both case studies in two separate reports in report format saved into one word document. No Executive Summary or Contents page is required. A short introduction and a short conclusion will be ideal. Provide (create your own) a title that indicate what you are trying to discuss for each report.
Under extenuating circumstances where high % similarity indicates copying and paraphrasing from written works of other students in CQU or other universities or any other institutions world-wide, the assignment may be reviewed by academic misconduct board for appropriate actions.
The rubric on the marksheet below is to let you understand how the marks are distributed and awarded for each question. For calculation questions, marks will be awarded for the accuracy in the calculations, showing the right formulae to be used, the steps shown in arriving at the answers, the correct answers and any diagrams/timeline as required. Correct answers alone will give you 50% of the total mark. Marks will be awarded for clarity of explanations and expressing yourself in your own words. Concise description and correctness of answers are also important together with any diagrams or figures where applicable.
The assignment will be marked out of 80 marks but will be scaled down to 20 marks. Penalty for late submission is 5% per calendar day, i.e, 1 mark per calendar day (including Saturday and Sunday).
3. Assessment Questions
Please provide answers / solutions to the following two Case Studies in two separate reports:
3.1 Case Study 1: Financial markets
“Troy Dexter is an affluent venture capitalist based in Sydney. In 2009 Troy founded a hedge fund called Northwest Capital Management. A hedge fund is an investment fund whose aim is to deliver positive returns on money invested while minimising risk. A hedge fund can be thought of as a company whose main activity is to invest in a range of financial assets. Troy’s hedge fund adopts a macro investment strategy that aims to profit from significant shifts in the economy. Apart from his own money which he uses to invests in a range of financial assets, the fund is also open to investors who can participate in the fund for an annual management fee. Although hedge funds aim at reducing risk by employing different hedging techniques, there is still a certain element of risk as there are periods where the returns on investments are negative. Troy’s vision of the future is that the strong growth in Australian housing market will come to an end, economic growth will stall and the price of oil will escalate. This Troy is currently buying treasury bonds in the debt markets and energy stocks in the share market.
1. From the point of view of Northwest Capital Management, are treasury bonds and energy stocks direct or indirect securities? Explain.
2. Consider an investor who invests money in Northwest Capital Management. The money ends up being invested in treasury bonds and energy stocks. From the perspective of the investor, does she hold direct securities by investing in Northwest Capital Management?
Financial markets can be indicated as a market in which individuals other than investors consider buying and selling of several shares, financial securities, bonds, debentures and many more. Transaction costs are deemed to be decreased within financial markets and the securities prices indicate the supply and demand within the economy. While making decision regarding investment, the investors might consider several financial market based aspects including return nature, risk factors, recent economic conditions and several other things (Andor, Mohanty & Toth 2015). Detailed analyse or research regarding certain important factors is required while taking decision regarding investment. Several securities are present within the financial market such as direct and indirect securities. Segmenting the securities into direct and indirect securities is essential while taking an investment decision. The kind and retune amount greatly relies on the securities type.
The case study explained that Troy Dexter has his business in Sydney and is a renowned venture capitalist. The person developed a hedge fund in the year 2009 such as ‘Northwest Capital Management’. In consideration to the same, gathering enough knowledge regarding hedge fund is essential as several investors consider hedge funds are considerably important (Bond, Edmans & Goldstein, 2012). It is gathered that hedge fund securities along with its assistance facilitate the investors in investing within a pool of hedge fund securities. The major objective of a pool of hedge fund is to offer increased amount of positive return through decreasing several risk factors associated with investment.
The case study revealed that hedge funds employs strategies those are short-term. Within the long position strategies, the stocks are gathered from share market. Moreover, in consideration to short-term strategies, securities are sold and bought at the time the securities prices drop. Other than that, in certain cases it has been gathered that a huge proportion of hedge funds invests within financial derivatives. Within the derivative process, buying and selling of securities takes place with specific prices of the contracts. Hedging fund is not deemed as liquid like the mutual funds (Brunzell, Liljeblom & Vaihekoski, 2013). For this reason, it indicates that shares selling within hedge funds are not that simple. On the contrary, it is gathered that hedge funds all through the world considers employing advantageous strategies. Within such strategies, investment takes place through using borrowed money. Such strategy can be useful for the investors for attaining increased positive returns. Moreover, a key disadvantage of such strategy considers that increased risk amount is associated with hedging strategy. For this reason, it can be explained that in the possibility of increased positive return, hedging funds encompasses increased risk.
In consideration to same, another vital factor is an indirect and direct securities concept. While taking an effective investment decision, the investors are needed to own certain assets for making huge investments. A great difference has been observed to be present within concept of direct and indirect securities. Within direct securities case, investors own specific assets within which investment was made. Within direct securities process, the investors are accountable for making investments and they have great control on their investments. Moreover, in direct securities, the investment process is totally relied on the individual investors (Chan, 2017). The investors do not require being relied on a third party while taking decision regarding investment within direct securities. While investing within the direct securities, the investors might consider taking every type of risks. This is the reason for which the person gathers enough rewards from the direct securities. The process of investing within direct securities at the time of consuming is not that simple as making an investment within bonds and shares.
Answer 2: Investor's Perspective on Direct Securities
Indirect securities concept is relied on direct securities concept. While investing within the indirect securities, an investment vehicle is employed by the investors in order to gather enough money from the investors. Within case of indirect investments, the investors do not own property and the indirect investment process requires being carried out with the support of an intermediate and third party. Within indirect securities, investors are deemed to borrow money from several types of funds from financial market from support of intermediaries. Within the provided case, Troy Dexter is deemed to invest all his money within new hedging fund named Northwest Capital Management. Other than his money, the person has ensured opened fund for numerous investors to facilitate them in investing within specific hedging fund (Daunfeldt & Hartwig, 2014).
Vision of Troy Dexter explained that, a continuous growth within Australian housing market is deemed to drop along with shattering the economic growth of the nation. In such circumstance, the person considers purchasing treasury bonds and energy stocks within share market. In such case, Troy Dexter is not attaining enough help from the third parties while gathering treasury bonds and energy shares. On the contrary, he has money or property ownership that is invested by him within hedging funds (Levy, 2015). All types of risks considering he experiences specific investments and this is the reason for which, he can attain enough rewards from the hedging funds. These aforementioned factors are matched with the key aspects of direct securities. Therefore, from Northwest Capital Management perspective, the energy and Treasury bond serve as direct securities.
The above explanation indicated that there exist numerous direct and indirect securities aspects. As per such explanation, within the investment process within indirect securities, the investors do not directly invest within shares or property. Performance of such types of shares and properties is relied on certain measures of certain properties performance. In case of such investment process within indirect securities, the investors requires depending greatly on expertise and skill of selected people that includes a portfolio manager and several other people. Such investment process totally relies on portfolio managers those conduct the overall investment process (Harris e al., 2016). Shares or bond selection of the companies totally relies on the portfolio manager. A vital aspect is deemed properties ownership. Within the investment process of indirect securities, the investors do not intend to attain property ownership. Within the indirect securities investment process, the investors are deemed not to have any property ownerships and they might not experience every risk factor associated with the portfolio. Due to existence of decreased amounts of risks, the chances of attaining increased properties amount is fewer.
Based on a question within the case study, an investor considered investing a great amount of money within Northwest Capital management of Troy Dexter. In such scenario, the investor considered investing a huge amount of money with his help within bond portfolio and shares. In such scenario, the investor must be relied on the person managing his investment. The person does not require taking part in further risks and for such reasons, she must not accept any father risks and for reasons she must attain less amount of return (Sridhar, Shetty & KB, 2015). Another important aspect is certain fee that is required to be paid by an investor to the Troy Dexter in order to manage all the investments. From the above explanation, it might be gathered that investment made by an investor is aligned with the entire criterion for being an indirect investment. Several important characteristics that are required to be within indirect securities are existent for an investor’s investment. For this reason, it can be indicated that investor does not attain direct security through investing greatly within Northwest Capital Management as an indirect security.
From the above scenario, it can be gathered that hedging fund serves as a process of difficult investment as several vital aspects can be taken into account while taking investment decision. In such consideration, two vital concepts include direct and indirect securities. The investment process of the direct securities, the investors has attained properties ownership for which they require taking increased amount of risks. For such reasons the return rate is higher. On the contrary, in the investment process of indirect securities, the investors might not attain ownership and for this, they might to require accepting increased risks. This is the reason for which return rate is increased. On the contrary, within the investment process of the indirect securities the investors might not require taking increased risks. Such reason results in decreased return amount for investors.
This aspect of the report is deemed to deal with the Norwich Tool case study that is an increased lathe machine shop. It is deemed to replace one of the machines with huge lathe machine shop. It deems to replace one among the machines with Lathe A or Lathe B. Lathe a serves as a computer-controlled and automated lathe that might result in enhanced production of a company. Moreover, Lathe B is not that costly in account to Lathe A for it employs a superior technology (Elmassri, Harris & Carter, 2016). For analysing between both the alternatives, the company has employed a financial analyst in order to analyse the initial outlays along with important cash flows associated with every Lathe. For this reason, several techniques of capital budgeting includes net present value, payback period and internal rate of return that has been used for evaluating feasibility of the overall project feasibility. Based on the fact, certain recommendations have been offered to the companies through making sure it is unlimited funds along with enough capital rationing.
Based on the mentioned case study, it was gathered that Norwich Tool has the capability to accept certain projects that has maximum payback period for over future years. Della Lucia, (2013) indicated that payback period can be understood as time amount in which a project’s initial outlay might be recovered from a project’s likely cash inflow. The payback period is deemed a considerable indicator in making sure whether to accept a particular project. This is due to the reason that a particular project has an increased payback period that is not a feasible consideration for investment. In such scenario, it has been gathered that the payback period for lathe A was 4.05 years and for the project B it is 3.65 years. Payback period for Lathe A is deemed to be lesser in consideration to maximum acceptable payback period of a selected company and vice-versa for Lathe B that is deemed to be most viable option in order to invest.
The table above indicated that the NPV of Lathe A is deemed$58,133; on the other hand, NPV of Lathe B is deemed$43,483. The increased is the NPV; the better it will be for a company. This is for the reason that it might facilitate in increasing investment returns. In such scenario, Lathe A has an increased NPV that indicates the company must consider Lathe A for increasing the investment return. On the contrary, for Lathe an IRR is deemed 15.95%, while for Lathe B it is 17.34%. An increasing IRR is deemed better for a company in order to increase its total return. In addition, for the projects are mutually exclusive, this is considered being feasible for employing NPV technique for it offers a realistic assumption along with offering superior profitability measure. For this reason, Latte A requires being accepted as per this technique (Elmassri, Harris & Carter, 2016).
In a situation where a company has enough funds, superior priority must be offered to Lathe B for it has positive IRR and NPV. Moreover, desired payback period is observed in case of Lathe B at the initiation time of the project. Moreover, it might also take into consideration that Lathe A can attain positive NPV with increased IRR that is increased than the cost of capital.
In the capital-rationing scenario, it is anticipated that the company must select Lathe B, as the payback period is more than the desired level. Moreover, because of the lack of funds the company must consider to select Lathe B for it addresses all the basic needs of a company (Harris e al., 2016).
In such scenario, a company has enough funds and the first importance is offered to Lathe B, for it has positive IRR and NPV. Moreover, for Lathe B, the payback period is deemed to be within the desired range at the time the company decides while initiating a particular reject. Moreover, it might also take into consideration Lathe A as it might attain positive NPV with increased IRR that is more than cost of capital.
From the analysis above, it can be explained that Lathe B is recommended for a company for it has both NPV and IRR along with the suitable payback period. In addition, if a company has further funds it might consider both the lathes in order to enhance the company’s total production capability.
Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: a survey of Central and Eastern European firms. Emerging Markets Review, 23, 148-172.
Bond, P., Edmans, A., & Goldstein, I. (2012). The real effects of financial markets. Annu. Rev. Financ. Econ., 4(1), 339-360.
Brunzell, T., Liljeblom, E., & Vaihekoski, M. (2013). Determinants of capital budgeting methods and hurdle rates in Nordic firms. Accounting & Finance, 53(1), 85-110.
Chan, K. (2017). Securities markets.
Daunfeldt, S. O., & Hartwig, F. (2014). What determines the use of capital budgeting methods? Evidence from Swedish listed companies. Journal of Finance and Economics, 2(4), 101-112.
Della Lucia, M. (2013). Economic performance measurement systems for event planning and investment decision making. Tourism Management, 34, 91-100.
Elmassri, M. M., Harris, E. P., & Carter, D. B. (2016). Accounting for strategic investment decision-making under extreme uncertainty. The British Accounting Review, 48(2), 151-168.
Harris, E. P., Harris, E. P., Northcott, D., Northcott, D., Elmassri, M. M., Elmassri, M. M., ... & Huikku, J. (2016). Theorising strategic investment decision-making using strong structuration theory. Accounting, Auditing & Accountability Journal, 29(7), 1177-1203.
Levy, H. (2015). Stochastic dominance: Investment decision making under uncertainty. Springer.
Sridhar, S., Shetty, S., & KB, K. (2015). Personality and Investment Decision Making of Individuals.
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