Question

The objective of firms is to maximise the shareholders’ wealth. By doing so, management should make the best decisions for its financing and investing to create value in shareholders’ interest. Thus, the information pertaining to firm’s financial decisions should be incorporated into its stock price. As a junior fund manager, you are tasked to analyse the possible value of firms’ information in your investments.

Required:

1. You believe that both financing and investing decisions contain new information of firm value perceived by the investors. Thus, stock price reacts positively or negatively to it. List three decisions each for financing and investing of firms.

2. If you believe Capital Asset Pricing Model (CAPM) is true on pricing the risky securities, what would be the impact of firm’s decisions on your investment value or strategy.

3. Hedge fund managers believe that event-driven investment strategy, i.e. announcements of firm’s financing and investing decisions, could possibly generate abnormal or excess portfolio return. Do you agree with this statement and why? State your assumptions when necessary.

Answer 1

Q; Ans:

a: Three decision for financing :

• The issue of equity share by company
• Issue of debt and equity mix by company to public
• Investment in stock and marketable securities, mutual fund etc

Three decision of investment :

• Investing fund in real estate which has good future value
• Investment made in research and development
• Purchasing some fixed asset

b: Capital asset pricing model is the concept that describes about systematic risk and expected return from market.

It is mostly vested upon the concept how the company invest fund sin risky assets and expect high possible return from that.

Here the company invest its fund in choicable assets, stocks . It takes risk by investing on it for getting maximum return.

The pricing done by company on assets , how these assets are managed well with risk that pose marketable risk on firm's decesion value.

This theory helps investors what sort of investment their investing goal deserve.

c:Hedge fund manager believes that announcing financing and and investing decision could possibly create abnormal or excess return. I will go by this concept as for following reason:

Announcement of investment decision and financing decision news create matters as it attract the eyesight of possible investors to invest in company.

The circulation of news of new investment or financing event create demand of stock price in the market.

stock price of company is very sensitive to market news. The short term demand can generate high abnormal return for the investors investing on it.

Another fact it may be like when company do invest it hedges the risk and makes some strategies to manage unforeseen risk hazard in order to get expected return from the sources.