Finance Session Long Project by Abhishek Gupta (SMBA12040)

7/28/2019 Finance Session Long Project by Abhishek Gupta (SMBA12040)

1/28


2/28

1

ASSIGNMENT 1

CHIEF EXECUTIVE OFFICER

CEO is considered to be the highest level of hierarchy in an organization. The general hierarchy

of an organization is:

As you can see from the level of hierarchy of management, CEO reports directly to the

Managing Director of the company. CEO is the one who is responsible for all ups and downs in

an organization. Also he is the highest paid employee of the organization. Sometimes CEO


3/28

2

title can also relates to president. As president title means the democracy level, the title is

generally not used in many organizations.

Roles & Responsibilities

1. CEO is responsible for creating & managing the companies mission & vision2. He must implement all the strategies required to reach the targets3. CEO must motivates the employees in order to maintain a high efficacy in the

organization

4. A CEO must have good decision making skills who can plan for the future opportunities5. CEO also have to manage the Human Resources for the company6. CEO generally assist the Managing Director of the organization to achieve the

governance function.

7. CEO acts as a leader in the organization as he is the one who gives advice to higher levelof hierarchy, look after the organization products & operations.


4/28

3

CHIEF FINANCIAL OFFICER

As you have seen the level of hierarchy of management, CFO comes just under CEO as a Top Level managers. CFO is also abridged as Critical Few Objectives. He is responsible for

supervising accounting managers and also for financial controlling in the organization in order

to enhance the shareholder value.

MAJOR RESPONSIBILITIES

PerformanceFinancial

Plans

Shareholder Money4

CFO must protect

the company

owners financially.

Measure Performance2 Financial Reportsshows how the firm

is performing.

Financial Plans1

Create Financial

Plans for the

organization.

Accounting & Tax Process

3CFO must also look

forward to accounting

& taxes to minimize

financial risks.

Enhancing

Shareholder

Value

Accounting &

Taxes


5/28

4

FINANCE DEPARTMENT: FOR TRAINING

FORTHCOMING CEO

Corporate World is on the rise and the companies are in a dilemma whom to opt for a CEO.

They want a person who has the abilities to manage any perplexing situation. From 1990s

there has been a propensity of employing former CFO as a CEO. But the question arises

whether he is a right person for the CEO position or not.

In general CEO must have certain individualities like leadership, strategic abilities, better

communication skills etc. which hadnt been seen in CFO.

PROs & CONs OF SIGNING CFO AS A CEO


6/28

5

ASSIGNMENT 2

AUDI AG (AKTIENGESELLSCHAFT)

AUDI AG is a well known automobile brand headquartered at Germany, Bavaria & Ingolstadt.

AUDI AG instigated in Germany in 1909 by August Horch (Founder). Company name came from

Horch means to listen and AUDI when translated into Latin. AUDI plans, innovate,

manufactures & delivers best exquisite cars.

AUDI AG VALUES

Most of the time people acquaintances AUDI with its LOGO i.e. 4 Rings. In general, these rings

represent the merger of four leading motor manufacturers (AUDI, WANDERER, HORCH & DKW)

at the time of depression. AUDI AG is a subsidiary of Volkswagen AG ever since 1966. AUDI is


7/28

6

ranked no. 1 in terms of Total Quality Management (TQM) in 2012. Audi is the worlds best

selling luxury automobile brand.

WHY AUDI?

These parameters fascinated most to choose AUDI. They go hand in hand with the

technology. Audi had get through their targeted goals a lot of times which ensures it would

sustain in future run.


8/28

7

FINANCIAL HIGHLIGHTS

AUDI AG stocks are traded in various stock exchange:

1. Stuttgart2. Frankfurt A.M.3. Dusseldorf4. Hamburg5. Berlin

And till 31 December 2012 around 43,000,000 number of shares had been issued.

AUDI AG STOCK PRICE (PAST 12 MONTHS)

MONTHS STOCK PRICE (IN EUROS) % GAIN/ LOSS

APRIL'12 585 0%

MAY'12 560.5 -4.19%

JUNE'12 530.55 -5.34%

JULY'12 540 1.78%

AUG'12 524 -2.96%

SEPT'12 521 -0.57%

OCT'12 522 0.19%

NOV'12 515 -1.34%

DEC'12 525.1 1.96%

JAN'13 575 9.50%

FEB'13 565 -1.74%

MAR'13 580 2.65%


9/28

8

THE PERSON WHO BOUGHT THE SHARE ON APRIL'12

AND WOULD HAVE SOLD THE SHARE YESTERDAY

THEN

% GAIN/ LOSS -0.85%

HE'LL BE IN A LOSS OF 0.85% EURO PER SHARE

FOR EXAMPLE: HE HAD PURCHASED 15000 SHARES ON APRIL'12

NO. OF SHARES SHARE PRICETOTAL

COST

15000 585 8775000

AND IF HE WOULD HAVE SOLD SOLD IT YESTERDAY THEN

15000 580 8700000

THUS IS IN A LOSS OF EURO 75000

The most recent price of AUDI AG Share as of 17th

March 2013 is 581.


10/28

9

ABOUT TOP LEVEL MANAGEMENT

Mr. Rupert Stadler is the Chairman of Audi AG. He joined the firm in 1990 as a head of sales and

marketing team. In 1994, he switched to Volkswagen Audi Espana as a director where he had

to perform tasks like Accounts, & managing organization. In 1997, he got promoted to Head of

the Board of the Management & Head of Product Planning of the organization.

He became the Chairman on 1st

January 2007 & also serves as Chief Financial Officer of Audi

AG. Under his expertise, the firm has always outstrips the targets and come up with a new

benchmark. By 2012, the firm achieved the major target (Volkswagen group has added the

most attractive brand Ducati in their portfolio).


11/28

10

ASSIGNMENT 3

MARKET CAPITALIZATION

The market capitalization of the public stock in various economies as of early 1980s is as

shown:

COUNTRY FINANCIAL

INSTITUTIONS

INDIVIDUAL GOVERNMENT FIRMS MISC.

US 0% 100% 0% 0% 0%

UK 40% 20% 15% 20% 5%

Japan 80% 10% 10% 0% 0%

Germany 35% 25% 30% 10% 0%

Australia 30% 10% 20% 35% 5%

France 40% 20% 25% 10% 5%

Canada 55% 35% 0% 10% 0%

South Korea 35% 25% 20% 20% 0%

New Zealand 30% 15% 25% 30% 0%

Singapore 5% 65% 25% 5% 0%

Switzerland 45% 55% 0% 0% 0%

Hong Kong 0% 80% 5% 5% 10%

Belgium 0% 70% 5% 25% 0%

Greece 0% 50% 20% 20% 10%

According to the data, in US whole of the market shares are captured by individuals while in

Japan & Germany the shares are equally distributed among the economy.


12/28

11

AGENCY PROBLEMS SEVERITY IN

GERMANY/JAPAN THAN IN US

Agency problem increases when the individual ownership is greater. Thus, if we consider

Germany or Japan where the majority of stocks are owned by financial institution like banks

etc., thus the agency may incur less problems in such economies as compared to US economies

where majority of shares are earned by the individuals.

HOW FINANCIAL INSTITUTIONS IN US WILL

HELP AGENCY PROBLEMS?

Recent trends have shifted in US where Financial Institutions are leading the individual market

of public shares. These can be seen from the recent data of market capitalization as shown

below:

COUNTRY FINANCIAL

INSTITUTIONS

INDIVIDUAL GOVERNMENT FIRMS MISC.

US 80% 20% 0% 0% 0%

UK 100% 0% 0% 0% 0%

Japan 90% 5% 5% 0% 0%

Germany 50% 10% 25% 15% 0%

Australia 65% 5% 5% 25% 0%

France 60% 20% 15% 5% 0%


13/28

12

Canada 60% 25% 0% 15% 0%

South Korea 55% 20% 15% 5% 5%

New Zealand 30% 25% 25% 20% 0%

Singapore 15% 30% 45% 10% 0%Switzerland 60% 30% 0% 5% 5%

Hong Kong 10% 70% 5% 5% 10%

Belgium 5% 50% 5% 30% 10%

Greece 10% 50% 30% 10% 0%

The financial institutions high % of ownership may lead to greater agreement degree among

owners. Also Financial Institutions may be more efficient in controlling the managers than

individual owners. Thus increasing Financial Institutions stock ownership in US had led to

reduce the agency problem and thus enhancing the market control.


14/28

13

ASSIGNMENT 4

EXECUTIVE COMPENSATION

Executive compensation is the pay that an employee receives with regards to his tasks he

performs in the company. This includes salary, bonus, extrinsic rewards, and other personal

allowances.

COMPENSATION BASIC PARAMETERS


15/28

14

CEOs ARE OVERPAID

As per analyzed data,

In the year 1980, average CEO pay was 42 times the average hourly pay of a worker. This pay

got doubled to 84 times by 1990. By 2000, this pay got an unbelievable high to around 531

times to that of an average hourly worker pay.

What the firm feels that giving executive compensation helps to enhance the financials of the

company. But according to the market shareholders compensation survey, it showed that

returns to the shareholders was more for the companies whose CEOs salaries were under

$500,000 than for those who provides their CEOs a whopping compensation.

WHY ATHLETES AND TOP ENTERTAINERS

EARNS MORE COMPENSATION

Athletes like Tiger Woods, Beckham etc. and Entertainers like Oprah Winfrey, Tom Hanks etc.

generally earns at least the same compensation as of a CEO if not more than that. They are

getting paid because they are ones whom people want see and also for whom the people can

pay to see the show or game. This is the reason for which they are getting a higher

compensation.


16/28

15

ASSIGNMENT 5

AUDI AG STOCKS

FIVE YEAR CHART

According to this 5 year basic chart analysis of AUDI AG, it had seen that price was fluctuating

within a specified band of price limits (Between 500 to 650 Euros). The current stock price is

around 580 Euros. From the chart we can see that the stock price in early 2013 had started

from the trough of the limit. We can consider that the price of the stock might increase in the

next year as the return on equity of the firm 31.16% which is considered to be a good in stock

trading.


17/28

16

YEARLY STOCK PRICES

YEARS STOCK PRICE (IN EUROS) % GAIN/ LOSS

JAN'13 575.0 4.75%

JAN'12 548.95 -14.56%

JAN'11 642.5 14.32%

JAN'10 562.0 15.88%

JAN'09 485.0 14.17%

AVERAGE OF 5 YEARS 6.91%

ROE of AUDI AG is 31.16% and the Average %Gain or Loss of 5 years of the stock shows a

positive 6.91% value which means the stock is not a risky investment to be made.

The price of stock (if we compare the previous 5 years data) had a gain of approximately 14%

every year (2009, 2010 & 2011) but it fell down drastically by the same percentage i.e. 14% in

the year 2012. Again stock prices went up though not as much but was a great start.

If we take an average of all these data, we can predict that in the next year we can see a hike of

6.91% of the current stock price (575.0). So we can expect around 614.73 Euro to be the stock

price of AUDI AG by the year 2014.


18/28

17

ASSIGNMENT 6

MARKET VALUE AND BOOK VALUE OF

BAJAJ CORP

YEAR MARKET VALUE (INR) BOOK VALUE(INR)

2011 107.46 29.01

2012 99.6 29.01

2013 236.85 29.01


19/28

18

MARKET VALUE AND BOOK VALUE OF

HERO MOTOCORP

YEAR MARKET VALUE (INR) BOOK VALUE(INR)

2011 1985.25 214.83

2012 1838.55 214.83

2013 1904.15 214.83


20/28

19

HERO MOTOCORP VS BAJAJ CORP

2011 2012 2013

107.46 99.6236.85

1985.25

1838.551904.15

MARKET VALUE

BAJAJ CORP HERO MOTOCORP

2011 2012 2013

29.01 29.01 29.01

214.83 214.83 214.83

BOOK VALUE

BAJAJ CORP HERO MOTOCORP


21/28

20

The book value and the market value of Hero Motocorp is far more than Bajaj Corp. These both

companies deals with the motorbikes production. If we compared the difference in the price of

market value and book value of both these companies than Hero Motocorp had been observed

to have comparably huge market value of the shares around 9 times more than book value

while compared to a 7 times of Bajaj Corps.


22/28

21

ASSIGNMENT 7

COMPANY RISKS

PART A

1. Diversified RiskDiversified Risk may be defined as the risk associated with few assets of the firm. Risk is

generally due to the change in the price which may occur due to certain change in the

market.

This risk can be alleviated through diversification. Diversified Risk can also can termed as

Non Systematic Risk. Diversified risk can be explained by using certain examples:

Strikes between the employees of the company Suppose an Oil Firm is having a risk of drilling less or no oil

2. Un Diversified RiskUn Diversified Risk can also be termed as systematic, market or aggregate risk. This

risk generally relates to the entire economy but may differ by the buying decision of the

investments or purchasing the securities from different firms.

EXAMPLE TEXTGo ahead and replace

it with your own text.DIVERSIFIEDRISK

RISK

RISK

EXAMPLE TEXTGo ahead and replace

it with your own text.AGGREGATERISK

RISK

RISK


23/28

22

Systematic Risk can be explained using certain examples:

Earthquakes, Floods, and other weather related calamities may induce such risks

SOLUTIONS TO ISSUES OF INVESTORS

a. United States suffered from large fire in three major cities. This might have affected thewhole of the market and thus any configuration of stock would alter the entire

economy. This can be considered as aggregate risk as explained above for any natural

calamities it will be considered as non diversified risk.

b. An unexpected rise in the oil prices may affect the whole of the market and thus can beseen as systematic risk

c. The lawsuit filed against a particular firm and thus it will impact the same firm. This riskcan be avoided by adjusting the firm portfolio. So, it is considered as Diversified Risk.


24/28

23

PART B

a. Beta () for AUDI AG is 0.60. generally measures the systematic risk of the firmcompared to the market. of less than 1 means that the securitys price is less volatile

when compared to the market. Though it will possess less return rate, the securities

would be less risky.

b. As we knowRf= 4.5%

Rm - Rf= 6.5%

Thus using SML Method,

RE = Rf+ *(Rm Rf) = 4.5% + 0.6*(6.5%) = 8.4%

Thus Cost of Equity of Audi AG is 8.4%

c. We can find the portfolio of the companies using weightage average,p = w11 + w22 + w33

Choosing two other companies,

for BMW = 1.18

for Volkswagen = 1.52


25/28

24

p = w11 + w22 + w33

p = 0.33*0.6 + 0.33*1.18 + 0.33*1.52

p = 1.089

Now again using SML Method for this portfolio,

REb = Rfb+ *(Rmb Rfb) = 4.5% + 1.089*(6.5%) = 11.57%

So, I would conclude as the portfolio still depicts less risk and as we know low risk, lowreturn, we might get low returns from this stock.


26/28

25

ASSIGNMENT 8

LONG TERM PROJECT OF AUDI AG

Audi is planning to bring their concept of Audi A6 L electric hybrid into the market by 2014. Due

to the great success of Audi A6 in the market, the board of director came up with the decision

of introducing the same model with an option of electronic hybrid engine. This enhances the

efficiency of the vehicle. The company has predicted the efficiency of the electric hybrid would

be 100 km/ 6.2 liters. In order to keep the weight of the car under control, the might reinforce

materials like carbon fiber and aluminum which might reduce the weight by approximately 15%

as compared to steel. The owner of this car wont be feeling any performance lag as the car

would have a 2.0 liter gasoline engine that induces around 211 horsepower plus 95 horsepower

from the motor.

They are planning to bring this concept to market by 2014 into order to become market leader

of a new market segment.

They must go for equity funding. They can sell a portion of assets of the company in order to

start working on the concept. They must avoid debt funding as it can introduce more liabilities

in the company.

SHORT TERM PROJECT OF AUDI

AUDI AG is helping Relief fund in helping them to nurture excellence in the near future. AUDI

AG employees raised around 135000 Euro dollars to help Dazhou Childrens Welfare Center.

This is one of the top 10 relief projects. Apart from funding them, they organize ceremonies of

project completion with these children so that they dont feel disconnect among the society.

The employees at Audi AG contribute their 1 day salary to these relief fund occasionally.


27/28

26

ASSIGNMENT 9

CORPORATE EVENTS AND THEIR EFFECT

ON THE STOCK

Audi AG had an event for the top business leaders of India in Davos. There Audi had created a

unique driving experience on ice for the corporates. This event happed on January 31, 2013 and

thus the impact on the market shares can be seen from the below chart:

This chart shows the market price of the stock of Audi AG. As we can see the cursor at 31 Jan

2013, the stock price was Euro 575.00 per share. After the event had happened the stock as we


28/28

27

can see had took a hike to Euro 593.00 per share. This event had helped the company to

enhance the market capitalization.

Finance Session Long Project by Abhishek Gupta (SMBA12040)

Documents

Transcript of Finance Session Long Project by Abhishek Gupta (SMBA12040)