Investment and future profits for companies - Free Essay Example

Sample details Pages: 3 Words: 1032 Downloads: 3 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Investment is the use of capital in a particular activity in order to achieve a future profit and therefore the assessment of investment to the investor based on a comparison of the expected returns of the investment with the cost of funds invested. To study the investment options to be decision-makers (the investor) analysis of the characteristics and components of each alternative and of the following elements: 1-Cost of the investment. 2-period of investment. Don’t waste time! Our writers will create an original "Investment and future profits for companies" essay for you Create order 3-Flows generated from investing in a lifetime investor. Thus, the investment will be economically viable if the total of cash flows achieved during the investment is higher than the cost of the investment by the victimized. There are many criteria, indicators as tools used trade-off between investment alternatives and the investor can resort to a single criterion or set of standards, which depend on the decision to accept or reject the investment value of the index used, and the most important of these indicators: Investments ratios: There are different ratios designed to assistant investors for assess the returns on the investments .which divided into 4 ratios: 1- Dividend payout ratio. 2-Dividend yield ratio. 3-Earnings per share. 4-Price-earnings ratio. In addition to above, there are some methods used as tools to evaluate investments. There are four methods used by investors to evaluate investment in the company that are: 1-accounting rate of return (ARR) 2-payback period (PP) 3-net present value (NPV) 4-internal rate of return (IRR) This research will focus on the most important 2 ratios, which are: 1- Earnings per share and dividend per share ratio. 2-return on equity. Especially with many problems and disadvantages related to others methods such as: 1-problems with ARR: With used ARR, it almost completely ignores the time factor.- ARR create problems when considering competing investments of different size.- -ARR use of accounting profit. However, cas h flows rather than accounting profits are Important. 2-problems with PP: PP is not concerned with the profitability of projects but with payback period. -ignore cash flows which arising beyond the payback period. Avoid the practical problems of forecasting cash flows over a long period.- Does not provide a means of dealing with the problems of risk and uncertainty. So, why NPV is superior to ARR and PP? Because NPV fully takes account of each of the following: 1-the timing of the cash flows. 2-the whole of the relevant cash flows. 3-the objective of the business. Why NPV? Because it is provide different important points helps investor to assess dictions investments which are: 1-considers all of the costs and benefits for investment opportunity. 2-makes a logical allowance for the timing of this cost and benefit. 3-related directly to shareholders wealth objective. RAM Holding: Rate of Return on Invested Capital: 1- And can be calculated in many different ways as follows: Rate of return on equity = profit after interest and dividend preference shares / ordinary share capital + reserves. Profit after interest and dividends/ Rate of Return on Invested Capital = share capital + share premium account + share option reserve + revaluation reserve For 2010 : profit for 9 months 2010 = (56,265-19,022) / (672+351,578+61,474) =37243/413724=0.09 2009 = (40,439-28,961) / (672+351,578+61,474-155) =11478/413569=0.03 2008= (43,592 26,383) /(672+35,578+61,474 285)=17209/97439=0.18 2007=( 35,250 18,547 ) /(672+351,578+61,474 214)=16703/413510=0.04 2006= (48,156 -12,367) /(695+449,195+61,474 544)=35789/510820=0.07 The profit after tax is the most accurate because the administration is seeking to reduce the tax, however, some of the allocations of deferred taxes may be subject to the rule of personal, so, and the rate of profit before tax is more objective. There is another rate of return on invested capital is: Overall yield = Operating profit / capital + reserves + Loan Operating profit/capital shares + reserves + loans overall yield= 2010 =72,713/ (672+351,578+61,474+0) =72,713/413724=O.18 2009 =45,614/ (672+351,578+61,474-155+0) =45,614/413569=O.11 2008=59,943/ (672+35,578+61,474 285 + 0) =59,943/97439=0.62 2007=39,694/(672+351,578+61,474 214 +0)=39,694/413510=0.096 2006=49,248/(695+449,195+61,474 544+0)=49,248/510820=0.096 Earnings per share EPS: 2- EPS is used as a measure of profitability and thus the increase in earnings per share is a good sign is also used to calculate the earnings per share relationship between profitability and share price, known as multiplier profitability. Earnings per share = Earnings available to Ordinary Shareholders / Number of Ordinary Shares. For 2010:Earning for 9 months Earnings per share 2010=56,265/1,348,277,000=4.3 2009=40,439/1,344,055,696 =3.11 1,344,055,696=3.39 43,592/ 2008= 2007= 35,250 /1,344,055,696 =2.59 2006= 48,156 / 1,389,907,834 =3.43 Determinants of earnings per share: 1 The case of high prices increase: the profitability of the shares increase when profit increase. 2- Earning per share based on the earnings number is a measure influenced by the elements affected by the decision profit such as depreciation. 3 You should not use profits as a measure of a single level of performance. 4 Cannot use earnings per share basis for comparison between companies because the number of shares issued to each company is not linked to capital invested. 5 The earnings per share represent the historical value, although used to prepare the outlook for the profitability ratio multiplier. EPS related the earning generated by the business and available the shareholders during a period to the number of shares in issues. The trend in EPS over time is used to help assess the investment potential of a businesss shares. Per share dividend: = Dividend Number of Shares. PSD For 2010 : dividend for 9 months 2010 =19,022/1,348,277,000 =1,4 2009 =28,961/1,344,055,696 =2.42 2008= 26,383 / 1,344,055,696 =2.20 2007= 18,547/ 1,344,055,696 =2.00 2006= 12,367 /1,389,907,834 =1.00 Linking with the payback through which the investor can determine the period of recovery of initial investment by the company and the less period is the better for the investor. To emphasize the relationship between returns and risks for the investor positive relationship. The Authorized share capital of the company is 2,200,000,000 ordinary shares of O.O5 pence each Buyback programme in July 2005 Main competitor: Intel Accounting Policies: The preparation of consolidated financial statements in conformity with U.S Generally Accepted Accounting PrinciplesGAAB. Report Accounting Standards: -In June 2009, the Financial Accounting Standards Board FASB issued new standards for the accounting for transfers of financial assets and are effective for Intel in the first quarter of 2010 beside many adoption in standards from FASB and some of them effected to Intel and other will effect in 2011. Products depend on market share in 2009 Main Microprocessors Chipsets Motherboards Platforms ARM Holding The consolidated financial statements prepared in accordance with International Financial Reporting Standards IFRS as adopted by the EU (UK GAAB for the company) and from 2006 the company applicable reporting under IFRS. Summary of accounting policies: IFRS 8Operating Segments IFRS 7 Financial instruments: Disclosures IFRS 2 Share-based payments Products depend on market share in 2009 Main Mobile Phones = 75 % market share. Hard Disk Drives = 65% market share. Digital TVs and Mobile computers = 25% market share. Microcontrollers Microprocessors= 5 % market share.