Assesment 2 – Finance

Group Project

Abdulla AlMehaiza -201500357

Majeda Taher - 201401267
Oamima Abdulla -201500103
Mohammed AlBanna -201401301
 Brexit Pensions

Question 1-The dicount rate is that of three main monetary policy tools that is used to
operate the supply of money and maintain stability whilst minimizng liquidity by the
Central Bank. The disocunt rate is used as the interest rate by the Central bank
whenmoney is borrowed by banks, making the banks a link between consumers whilst
exerting influence on the economy. The discount rate is to be carefully considered in
order to prevent inflation and deflation. The disocunt rate is regulary monitered to keep
the economy healthy, it can also be described as the interest rate which is used to
establish future cash flows present values. As it is commonly seen the lower the
discount rate is the more people will want to invest and vise versa.

Question 2-The Uk is requested to participate in the Uk debts as the European Union is

demanding. As we have encountered, the UK pension cash liability automatically
increases as the discount rate reduces, this is why the UK will aim for a high interest rate
as it will directly decrease the pension cash liabilities. In te years of 2011 till 2016 there
has been an increase in the pension liabilities since the decrease of the discount rate
which can only mean that the UK are going to have to pay more. The shift in the interest
ratethat has effected the dicsount rate to fall alongwhich negatively increasing the cost
for the UK from 35 billion euoros to 67.2 billion euros. The decrease that is caused
within the discount rate would effect the pension liabilities causing the UK to have huge
debts, that is why the conflict of costs arising from divorces and how it should be
calculated is being disputed. The EU increase in demand would be effected by the
discount rate decreasing which willl cause tension to rise. A high discount rate will
beifict the UK as both the expenses and pension liabilities would decrease.

Question 3- Nominal rate is a percentage of interest rate provided by the central bank
that is not taking under consideration the effect of inflation. Adding to that, it’s an
interest rate that is set upon investors and loans (bank, 2016).
Real interest rate is a percentage of return that takes inflation under consideration
which is the rate that borrowers expect to receive from their lenders. Additionally, real
interest rate can be positive or negative depending on the nominal rates. For instance, if
the nominal rate is lower than the inflation that could lead to investors losing their
money which by that means the real interest rate is negative. Furthermore, the formula
of calculating the real interest rate is nominal rate minus inflation (myaccountingcourse,
n.d).
(REAL INTEREST RATE= NOMINAL RATE – INFLATION)
A risk premium is the expected excess return from the risk free rate of return an
investor is expecting to earn from the investment. For instance, expert and established
businesses with big profits are less expected to face default. As a result, these
companies pay lower interest rates than other companies with unstable profit.
Furthermore, a risk premium is calculated by deducting the investment return from the
risk free return (investopedia, n.d). As an example of a country that suffers of high risk
premium there is Madagascar with 51% risk premium rate in 2015 due to its struggling
economy (Oberheu, 2017).
(RISK PREMIUM= INVESTMENT RETURN – RISK FREE RETURN)

Question 4-Following the article, United Kingdom can argue in this case where the
European Union is calculating their contribution via discount rate to add it to their
balance sheet. Moreover, the European Union was using different interest rates for the
payment of their employees which leaded to increasing their paying even though their
documents present that the discount rate in their balance sheet was decreasing due to
the interest rate. Adding to that, it also leaded to deduction in take-home pay .However,
the European Union did that to avoid massive changes to the annual payment presented
to the employees which then will lead for the employees to sacrifice minimum amount
of their base salary. On the other hand, United Kingdom is liable to argue that it only
make sense if they would have the same generosity upon their tax payers by applying
this logic to all fields. Yet, since the United Kingdom itself is applying low discount rate
of 0.24% then it may face challenges in persuading it argument. Moreover, telegraph
article states that the United Kingdom could have stated an argument that they should
not be responsible for the European pension and that they should mainly consider the
Europeans as liable. On the other hand, the united state of America was consuming a
close discount rate of 0.5% back in 2010 (nationmaster, n.d).

Question 5-
Year 1980 1993 1994 2004 2017
Discount 4.7% 9.4% 6.8% 2.3% 0.25%
Rate

Pv=Fv/(1+r)^n
N = 2060 – 2018 = 42
 1980 = 110 billion / (1 + 4.7% )^42 = 15.982 billion
 1993= 110 billion / (1+ 9.4%)^42 = 2.527 billion
 1994 = 110 billion / (1+ 6.8%)^42 = 6.940 billion
 2004 = 110billion / (1+ 2.3%)^42 = 42.326 billion
 2017 = 110billion / (1+ 0.25%)^42 = 99.048 billion

The most representitve of future rates moving forward would be 9.4% as this rate allows
the least amount to be depositied being 2.527 billion.

Question 6-As to a reccomendation based on the payment that Great Britain should
proceed with, the total annual payments was 104.7 billion euros and the NPV calculated
towards the total annual payemnts stands at 61.5 billion Euros. Based on the statistics it
would be better of for the UK to pay the one off payment as 60 billion euros as it would be less
money payed in comparision to 61.5 billion euros. This could be benificial as a one sum
payment avoids the troubles of the rate of return from annual payements. An NPV is known a
sa profitability guage metric unit that can tell us how profitable an investment would be along
the considerations of discount rates and payemnts . Also an NPV calculation wouldn’t be the
best option for this case as NPV are sensitive to icount rates which are clerly declining/ chaging
in each year which could turn the amount to be invested or paid upside down being high or low.
Also the NPV is expressed in currency that id sue to change.

Part 2 – Tesla Vs Ford

Question 1-Market Capitalization is known as the total market value for the outstading
shares of a company and this is found by a simple formula that consists of multiplying
the outsatnding sahres of a company by the stock price. As this is clearly represented,
market capitilization is not limited to a companies size in relation to the revenues and
number of employees. The market capitilization is used by invester’sworlwide to
determine the size of a company(Town, n.d).

According to the financial indicators, Fords market capitalization is stood at $43.888B

while Tesla has a market cap of $51.13B, the difference in Teslas advantage could be
explained using a few ratios, which are the Book share ratio, Cash share ratio, Debt to
Equity ratio, current ratio and the forward P to E ratio.

 Book Share Ratio: The book share value for Ford is $9.16, indicating the amount
of money that would be received by shareholders in the event of liquidization.
Tesa has a book share ratio of $25.17. In the case of liquidation a higher book
share value would be benifical as this inidcates the retention of the companys
value, poistively effecting the shareholders of Tesla. This causes an increase in
the market capitization as the book sharevalue increases causing liabilities to
reduce.
 Cash Share Ratio: The cash share ratio is that money that is instantly accesible to
be used,for Ford is $10.37 whilst Tesla stands at $19.37 suggesting that Tesla is
perfroming better than Ford, having a positive cash flow and the ability to
reestablish their investments also menaing that they have their money in liquid
form. This is a reason behind Teslas market capitalization being
bigger(readyratios, n.d).
 Debt/Eq – The ratio indicating the debt to equity is a companys leverage
measure and is measured by dividing the total liabilities by the stockholders
equity; for Ford it is 4.35 while Tesla stands at 2.43, this means that the lower
the D/Eq is the higher the opertunities to invest are, leading to a high profit
company which can boost the market cap(investopedia, Debt/Equity Ratio, n.d).

 Current Ratio: The current ratio is is measure of a companies ability to manage

both its shortand long term liabilities, in other words a liquidity ratio which is
measured through dividing current assets over current labilities. A current ratio
that is below 1 could mean that the comanys financial state is not at its best
because a ratio higher than one menas it ha smore assets than the value of
liabilities. Ford holds a 1.20 ratio whilst Tesla has 0.90.

 Forward P/E – This ratio is a measure of P/E with forecasted earnings, these
estimates could be for 12months to a fiscal year period,this ratio helps decide
the value a company will have in the future. When comparing, if the forward P/E
is lower than the P/E then that means a compnays earning are expected to rise
and vise versa. Fords P/E is 6.18 while its Forward P/E is 7.41 which means there
could be an exected decrease whereas Tesla P/E is not given its forward P/E is
155.36(macrotrends, n.d).
Question2 -A stock that pays dividends can be an investor’s choice to make money,
whilst collecting dividends and investing in companieswhich produce a higher
percentage of the share prices (Kennon, 2018). As for Tesla not paying dividends,
investors can choose capital gain and shorting. Investments relating to the value and
growth are those that investors choose stocks with a low price which is anticipated to
grow or that which is steadily growing, this leaves the investor owning the stock and
also anticipating the increase of the value of assets.

Tesla is not to be expected to pay dividends as the company keeps reinvesting innew
oppertunities and inovations in comparision to Ford which is a well established company
therfore menaing its cash flows are steady and growth is limited and it deends on
investors for support therfore for those lookig for a steady income Ford would be a
better choice as dividends are paid making them the shareholders primary source of
income.

Question 3-In accordance to INVESTOPEDIA, a stock market index is a weighted average

of several stocks or other investment vehicles from a section of the stock market, and it
is calculated from the price of the selected stocks. Market indexes are intended to
represent an entire stock market and track the market's changes over time. (Staff, 2018)

For this graph the red line represents ford

The blue line represents Facebook
And the green line represents the S&P 500 stock market index

For this graph the red line represents Tesla

The blue line represents Ford
And the green line represents the S&P 500 stock market index

You can see that throughout the whole period, Ford remained below the stock index
while Tesla’s stock has been well above the stock index since 2013. Ford has equaled the
stock index until the fourth quarter of 2014 where it began to go below the index, Ford
continues to steadily decrease in value and remain below the line (index line) to this
day. Tesla on the other hand, has been increasing and skyrocketing with minimal
setbacks in increase until it has reached its current status in 2018.
References used:
Staff, I. (2018, April 19). Market Index. Retrieved from(investopedia, Market Index, n.d).

Question 4
Question 5

Question 6-
Question 7- As my risk tolerance is low. I am a risk adverse investor. I always try to go
with the safe option to ensure that I make moderate but safe financial gains. Based on
the beta of both stocks, Tesla holds the lower beta which means it is the less risky stocks
and so it is the stock I am leaning towards.

My investment timeframe will be a long-term investment of 15 years. I have chosen so

as I am convinced of the advantages of a long-term investment such as: The lower
volatility rate which enables me as an investor the ability to weather or sustain low
market periods. Moreover, long term investing enables me to grow my wealth of
savings to the amount I need to reach my investment goals. (Quora, 2018)

Finally, my investment goals are related to reaching a certain amount of money which Is
what most investors tend to want that is why I choose to invest in Ford as this ROA ratio
Ispositive in comaprision to Teslas which means they are making more profit as to the
ROA of Ford it is a positive 3% in comparision to a -5.20% of Tesla it eithe rcoudl be that
Tesla is losing money or its buying assets for the future boom however being ris adverse
Ford is a better option as they pay dividends.
Reference
Highest Risk Premiums On Loans By Country
Investopedia . (2018). Discount Rate. Retrieved January 01, 2018, from
https://www.investopedia.com/terms/d/discountrate.asp
investopedia. (n.d). Debt/Equity Ratio. Retrieved june 6, 2018, from investopedia:
https://www.investopedia.com/terms/d/debtequityratio.asp
investopedia. (n.d). Market Index. Retrieved june 6, 2018, from investopedia:
https://www.investopedia.com/terms/m/marketindex.asp
investopedian.dRisk Premium
Kennon, J. (2018, February 5). The 3 Ways You Can Make Money Investing In a Stock .
Retrieved june 6, 2018, from thebalance: https://www.thebalance.com/the-3-ways-you-
can-make-money-investing-in-a-stock-357148
macrotrends. (n.d). Tesla (TSLA) EPS & PE Ratio History. Retrieved june 6, 2018, from
macrotrends: http://www.macrotrends.net/stocks/charts/TSLA/pe-ratio/tesla-inc-pe-ratio-
history
myaccountingcoursen.dWhat is a Real Interest Rate?
nationmastern.dCentral bank discount rate: Countries Compared
readyratios. (n.d). Price/Cash Flow Ratio. Retrieved june 6, 2018, from readyratios:
https://www.readyratios.com/reference/cashflow/price_cash_flow_ratio.html
Town, P. (n.d). Market Capitalization Meaning: Why Price Doesn’t Always Equal Value.
Retrieved june 6, 2018, from ruleoneinvesting:
https://www.ruleoneinvesting.com/blog/financial-control/market-capitalization-meaning-
why-price-doesnt-always-equal-value/
What is the difference between nominal and real interest rates?