Essay from the year 2012 in the subject Business economics - Investment and Finance, grade: 9, Maastricht University (SBE), course: intermediate financial management (IFM), language: English, abstract: Questions 1A) Business risk is the risk to firm’s stockholders without debt. Business risk can be measured by the standard deviation (later referred to as: SD) of “return of capital invested” ROIC= (EBIT (1-T))/Capital. Typical sources of business risk are factors associated with day-to-day operations of the business, such as input price-, demand-, sales price- and currency variability or the ability to innovate and the extent of operating leverage used. The establishment of long-term contracts can mitigate business risk with suppliers or distributors or with hedging strategies in case of currency risks. On the other hand, financial risk is the risk stockholders bear, because of the use of debt. In the case of debt usage the stockholders bear all the business risk, because debt holders receive a fixed interest payment. 1B/C) The additional risk from the debt can be measured, if one compares the levered beta to the unlevered beta. The levered beta should be higher than the unlevered and therefor react more severe to broad market movements, reflecting the additional risk. Moreover, since the beta is part of the CAPM model, the required return for equity holders rises which makes perfect sense, since equity holders want to be compensated for the additional risk from financial leverage. Leverage increases stockholders ROE, because the denominator of (Net income)/Equity is smaller since V_L consists of debt and equity, in contrast to a all equity financed company. Finally one can compare the SD of a levered and unlevered firm. The higher ROE comes at the cost of an increased SD, because of the higher variability of ROE.
Seminar paper from the year 2012 in the subject Business economics - Investment and Finance, grade: 9.0, Maastricht University (SBE), course: Intermediate Financial Management (IFM), language: English, abstract: Companies with few investment opportunities can invest money in an acquisition to forego issues of taxes at a personal level or excessive FCF. In addition, but not as a sole purpose, large tax losses or carry forwards by the target company could be used to reduce the future tax liability of the combined company. [...]
Bachelor Thesis from the year 2013 in the subject Business economics - Investment and Finance, grade: 8.0, Maastricht University, language: English, abstract: According to the efficient market hypothesis there should not be an asset overvaluation. Nevertheless, bubbles appear from time to time in the real world. In a financial bubble, the price of a security deviates grossly from its fundamental intrinsic value (Watanabe, Takayasu & Takayasu, 2007). Fundamentals or fundamental value refer to economic variables such as discount rates or future cash flows (Siegel, 2003). Depending on the valuation technique one can define an asset’s intrinsic or fundamental value, based on economic variables and assumed growth. A financial bubble is defined as a price run-up, where an initial price rise generates positive expectations of higher future prices, which attracts new buyers that are rather interested in reaping profits by trading the assets than using its earnings capacity (Siegel, 2003). There is a long history of bubbles such as the 1720 South Sea bubble, 1929 the Great Crash, in the mid-1970s the REIT bubble, in 1987 the housing crash, in 1991 the banking crisis, in 2002 the NASDAQ technology bubble and just recently the housing bubble in the United States, just to name a few. This capstone assignment deals with the question of how investors should act in the case of asset overvaluation in financial markets. In particular, it tries to answer how investors should behave. The central question asks whether investors should step aside and wait until the bubble bursts, whether they should ride the bubble or trade against it. Of course, there is support for all three, albeit contradicting theories. The different trading and investment strategies are reviewed, thereby touching upon various asset bubbles, financial concepts and empirical evidence in the academia. Moreover, it is elaborated on positive feedback trading and rational speculations, as well as behavioral finance concepts such as herding or overconfidence. The remainder of this paper describes different concepts outlined in the empirical literature, starting with asset overvaluation, followed by the efficient market hypothesis and the random walk phenomenon. The role of arbitrage traders is explored, and their impact on efficient markets and bubbles discussed. A review of behavioral traits during bubbles and the impact of human behavior on asset prices is included. Further, there is an examination of mutual fund strategies and their success in exploiting profit opportunities during bubbles. Finally, it is summarized which arguments support each of the viewpoints.
Document from the year 2010 in the subject Business economics - General, grade: 8,0, Maastricht University, language: English, abstract: The following short paper underlines the impact of bidding behaviour, at eBay auctions, on the sales price. At the online auction portal eBay, bidders try to get the object of desire as cheap as possible with the highest evidence of quality and security, while sellers try to sell their product for the highest price possible. This paper elaborates on the impacts of minimum pricing, reserve prices, last minute bidding, sniping and seller’s reputation on the end prices of eBay auctions from seller’s and buyer’s perspective.
Seminar paper from the year 2012 in the subject Business economics - Investment and Finance, grade: 9.0, Maastricht University (SBE), course: Intermediate Financial Management (IFM), language: English, abstract: Boudoir’s, Inc. is a profitable, growing company but has exhausted nearly all sources of financing, because they already pledged most of their assets as collateral to support growth. Theory assumes a match of the predicted assets useful life and its financing. Therefore a leasing agreement, especially taking into consideration the low amount, matches the cost of the asset with the corresponding cash flows produced by the asset. Furthermore, financing the new building and the fixtures for the new outlet with a leasing agreement provides an additional benefit because leasing agreements do not appear on the balance sheet of a company. In addition, lease payments are deducted....
Seminar paper from the year 2012 in the subject Business economics - Investment and Finance, grade: 9.0, Maastricht University (SBE), course: intermediate financial management (IFM), language: English, abstract: Today, DPF is in a weaker situation than the industry average and compared with itself historically. The current ratio fell from of 3.9, which is above industry average, in 1985 to 1.28, which is below average, in 1995. DPF’s is half as big as the industry average indicating a lower than average ability to meet their short-term obligations if they were due now. Furthermore, the current ratio measures how efficient a company can turn its products into cash, therefore a below industry average ratio indicates weaknesses in their operations (Investopedia, 2012). Over the last ten years the debt ratio increased from 35.3%, which was back then already above industry average [...]
Essay from the year 2012 in the subject Politics - International Politics - Topic: European Union, grade: 8,0, Maastricht University, language: English, abstract: In an ever more regulated world with a fast changing environment, the task of political strategic management, in former times viewed as cost, becomes crucial for companies trying to exploit opportunities. The growing number of company representatives in Brussels and Washington indicates this. Especially for companies with a business model dependent on the political environment, policies and legal framework, political management becomes as important as basic functions such as marketing. The following paper provides a guideline how companies can influence their political environment to maintain or create value in different societal-political contexts. It starts with the explanation of a compliance-based approach and continues with the influence-oriented approach. Four strategies are outlined, supplemented by means to accomplish the aim and classified within the societal-political contexts of corporatism and pluralism. Finally, there is a recommendation for firms which strategy to choose with respect to their societal-political context.
Seminar paper from the year 2012 in the subject Business economics - Investment and Finance, grade: 9.0, Maastricht University (SBE), course: Intermediate Financial Management, language: English, abstract: In 1996, Northern Electric and Mid-Continent Gas merged into the North Central Utilities (NCU) since both companies were convinced that future success is dependent on the provision of an entire set of energy sources. Furthermore the merger put both firms in a better position compared to their competitors, especially in view of the fact that in 1996, regulatory changes empowered companies to compete for business in other firm’s territories. Beforehand, competition basically did not exist and the profits were determined easily. Companies knew the amount of capital invested, the cost of capital and the product of those two demonstrated the profits, which had to be generated. In the following case, several questions will be answered to the changing conditions in the utility industry....
Seminar paper from the year 2012 in the subject Business economics - Investment and Finance, grade: 8.0, Maastricht University (SBE), course: Investment analysis and portfolio management, language: English, abstract: Most of today’s portfolios include bonds and equities. This composition enables investors to reduce firm-specific risk and diversify among different asset classes. Important assets that could further enhance diversification are investments in real estate. The risk-reducing effect of real estate partly stems from its local nature. Furthermore, investors, both local and international, face differences concerning the information available with respect to the real estate market and the bond or stock market. The former offers less information to investors than the latter market. Real estate markets are less integrated, which means that there are not many investments made in this market. This can be a further explanation of the positive diversification effects of real estate. Therefore, one could ask whether direct- or indirect real estate investment enhances diversification. The purpose of this report is to investigate whether there is a positive diversification effect of real estate on the risk of a portfolio. The report takes a look at previous findings of researchers concerning the diversification effect of real estate and proceeds with the analysis of the descriptive statistics. Next, the correlation between indirect and direct real estate, bonds and equity is examined followed by.....
Thesis (M.A.) from the year 2014 in the subject Business economics - Investment and Finance, grade: 7.5, Maastricht University, language: English, abstract: The following study examines the performance of mutual funds investing in small cap companies in the period from 1990 until 2013. Therefore, funds investing in small companies in Germany are tested on their ability to deliver risk-adjusted abnormal returns. The returns are risk-adjusted according to Fama French (1996) three-factor model, Carhart four-factor model and the liquidity adjusted five-factor model of Pastor and Stambaugh (2003). A separate examination of the internet crisis 2000 until 2003 and the financial crisis period 2008 until 2013 is done, to assess the ability of fund managers in isolation to examine their results in situations when their skills are most needed. On average, I conclude that fund managers, investing in the small capitalization segment in Germany, are not able to outperform the market even before fees.
Document from the year 2013 in the subject Business economics - Investment and Finance, grade: 8, Maastricht University, language: English, abstract: We go back to the year 1997 – the year in which two companies, a base metal company and a electricity company, several development banks and government development organizations, commercial banks and governments itself are in talks about the building of a new aluminum smelter in Mozambique. The project US dollar (USD) volume amounts to a total of $1.4 billion USD. Mozambique is one of the poorest countries in sub-Saharan Africa, which just recently ended their civil war. Additionally, Mozambique has the lowest per capita GDP of $90 USD a year in their peer group, a debt burden resulting from the previous civil war years of 355% of GDP. It ranks 166 out of 174 countries in the United Nations Human Development index. Eskom, a south-African energy company, which supplies 95% of the energy in south-Africa and 50% of the continents power, wanted to establish hydroelectric generators at the Zamibi river and rebuild the worn out electricity network, to supply power at competitive prices. The cooperation of Eskom and Alusaf secured Eskom a buyer for its excess power and Alusaf secured a critical factor of production at competitive prices. Alusaf, an aluminum subsidiary of Glencore, a south-African company operating in the precious metals and base metals industry, and IDC, a governmental owned development bank, are the main sponsors with an equal $125 million USD investment each. (A $125 million USD investment, amounts to 8.92% of the project value and 25% of total equity). The project is supposed to be financed with a 50% debt and 50% equity. Alusaf already built and operated a larger project of the same type, an aluminum smelter with double the volume – the Hillside smelter in Richards Bay with a yearly capacity of 500,000 tons. It accomplished it 21% below budget and 4 months before planned completion.
Document from the year 2012 in the subject Business economics - Investment and Finance, grade: 8.0, Maastricht University, course: Investment analysis and portfolio management, language: English, abstract: This paper is based on “The Common Fund Hedge Fund Portfolio” case from the Harvard Business School (Harvard Business School, 1996). The data provided are taken from it. It aims to support David Storrs, CEO of the Common Fund Company, decision if and how to include a hedge fund into the overall portfolio. The Common Funds has more than $17 billion assets under management for more than 1,000 educational institutions. Storrs considers to establishing a fund of funds, which he can offer his clients as a means of diversification. A hedge fund is an alternative, unregulated investment vehicle that can take long as well as short positions, use high leverage and write options or futures. The central question asks how Storrs should allocate different hedge funds in the funds of funds portfolio, taking into consideration the legal, economic and marketing issues, beside performance and volatility. The first section will touch upon the legal, economic and marketing issues of hedge funds with regard to the decision to take by Storrs. The second section is going to investigate the proposed allocation of assets and reconsiders the asset allocation. Thereby not only quantitative measures are taken into account, but also qualitative factors. Finally, an advice is given on how Storrs should allocate the portfolio with regard to the circumstances of the Common Fund Company....
Essay from the year 2013 in the subject Business economics - Operations Research, grade: 7.5, Maastricht University, language: English, abstract: Specializing in mining, commodity trading, specialty chemicals and financial services, Metallgesellschaft AG (hereafter MG) was one of largest German Industrial Corporation, with over 20,000 employees and an average revenue of $10 billion annually, who’s headquarter was located in Frankfurt. The financial statements presented by the board in December 1993 reported that the U.S subsidiary Metallgesellschaft Refining and Marketing (hereafter MGRM) suffered huge derivative-related losses of over $1bn dollar. Due to the gravity of the losses, it caused a serious threat of bankruptcy to the parent company MG. Many theories try to explain the management failure at MGRM that caused the huge speculative loss. The commonly accepted theory is that the management and board of MG were ill informed about its subsidiaries activities and speculation, making them vulnerable for making irrational decisions, which is represented by their overreaction, in particular to liquidize the outstanding contracts, which MGRM had with their clients. Many critics believe this heavily amplified the risk exposure of MGRM and caused the loss to increase in the long run. However, other empirical studies and economists argue that the liquidation of the contract was the best-case scenario at that time, but that the speculative contracts should have been constructed differently. Whether the board and management team responded properly to the situation or not, both parties tend to agree with the fact that MGRM speculated with a different reason than normally assumed in financial markets. Namely, considering its expertise and global influence in the oil market, the assumption that MGRM used derivatives to exploit arbitrage in the market seems commonly accepted. In other words, MGRM did not hedge to minimize risk, but to maximize profits. This strategy might have played a role in the cause of the losses MGRM made in the following years after the hedging program was initiated. This case will provide an overview of the business idea of MGRM and the hedging strategy that was initiated to mitigate the risk. Furthermore, this case will provide a brief overview of Culp and Miller’s opinion about MGRM hedging strategy. Substantiated by this article, this paper will provide an overview of the risks of the hedging strategy initiated by MGRM. Lastly, the management response will be analyzed in more detail after which a short conclusion is provided.
Essay from the year 2012 in the subject Business economics - Investment and Finance, grade: 7.5, Maastricht University (SBE), course: investment analysis and portfolio management, language: English, abstract: ECN is the acronym for “Electronic Communication Network”, an electronic system that facilitates the trading of financial products outside the usual stock exchanges. By introducing an ECN, trades can be completed directed without the need of a middleman or third party. Of course, there are fees connected to the usage of an ECN. The ECN connects buyers and sellers, also matches buy and sell orders at specified prices and detects whether there are matches between these two parties (Appendix A). [...]
Essay from the year 2010 in the subject Business economics - General, grade: 8,0, Maastricht University, language: English, abstract: After the beginning of the financial crisis in 2008, nearly every industrial oriented country struggled keeping the current economic level, due to a sharp economic downturn. The countries’ main aim was to stabilize declining sales volume and to hinder economic shrinkage in key industries. Key industries are industries with far-ranging value chains in different branches of a countries’ economy and different geographical parts of a country. Those key industries are the automobile industry in Europe and the USA. Many firms laid off workers or changed their labour condition into temporary work. The result was a lower national total income and less spending capacity which leads to lower demand and finally to a lower total economic surplus. To cope with the danger of a recession many of them introduced an economic stimulus package. These packages included subventions for certain industries or incentives for consumers and companies to plead investments. The following paper analyses and describes the impact of incentives and stimulus measures, such as scrappage bonus in Germany and UK or sales tax reduction in the US on sales and demand. It relates to basic economic models, theories and actions governments took to cope with these issues. In the last step, the paper outlines and further evaluates the main critics emerged in public press. Moreover it will be discussed whether the decisions, made by governments, contribute to long lasting economic growth and prosperity or not.
Research Paper (postgraduate) from the year 2014 in the subject Business economics - General, grade: 7, Maastricht University, language: English, abstract: Our paper looks at whether there is a difference in perception of utility with respect to our three decision settings- a) individual decision maker (the control group), b) decision maker with two advisors and c) group with three decision makers. To find ways how to de-bias decision-making, we specifically look at expected versus experienced utility between and within these groups. Our results show that there is not only a difference in utility perception with respect to the number and role of people involved with the decision but also that if sunk costs are involved the positive utility (joy) is stronger than negative utility (regret). Supported by significant results from our research we offer solutions to mitigate two of the four causes of the disposition effect discussed by Kahneman and Statman (1985): 1. Regret Aversion and 2. Prospect theory. The group decision part of our experiment shows a significant mitigation of regret aversion. We therefore propose a set of managerial implications. By forcing our participants to invest, we provoke the closing of a mental account rendering the investment a sunk cost for the investor. The resulting gain in utility is then not subject to the effects of prospect theory.
Essay from the year 2012 in the subject Politics - International Politics - Topic: European Union, grade: 7,5 , Maastricht University, language: English, abstract: Since its inception the European Union (later referred to as: the EU) has expanded to 27 Member States comprising more than 490 million citizens. The most important institutions are the European Commission (later refereed to as: the Commission) consisting of national ministers and the European Council (later referred to as: the Council), which is made up of the heads of the Member States. Furthermore, the European Parliament (later referred to as: the Parliament), consisting of 754 Members of Parliament (later referred to as: MEP) is the only directly democratic institution within the EU. In such a complex environment it becomes hard to make decisions that satisfy everybody’s needs. Therefore this paper tries to answer the question on how policy formulation and decision making processes within the EU function, thereby focusing on the governance mechanism of the EU and its Member States, taking into consideration the influence of stakeholders and the process of lobbying. Finally, the analyzed prevailing governance system is assessed in light of the Euro crisis. The paper is structured around two main issues, namely European governance and lobbying. Before these issues are discussed a brief introduction regarding the ordinary legislative procedure is given. Afterwards, the concept of governance, which is merged into European governance, is considered. Thereby the focus is put on legitimacy, in particular on democratic legitimacy. Since the EU’s governance system is partly dependent on its Member States systems, it is classified and compared to those. Following this, lobbying and the interest articulation of other stakeholders are discussed. By that means it is studied if some type of “elite pluralism” exists within the EU. Finally, there is a discussion about the shortcomings of European governance, with special regard to the current Euro crisis and an outlook on possible advancement of the EU is given, based on the line of argumentation put forward by The Economist.