Financial Markets and Institutions Assignment

You are the chief financial officer (CFO) of Rich Man Company Inc. The company has performed well over the past year. After setting aside money for dividends for the shareholders you have 10,000,000 Riyals in cash. You need to decide what to do with all the money you made. A meeting with the heads of the finance departments is called and you asked them for their recommendations. You tell them that although the current year has been good, you dont know how the next year is going to be. You also explain that according to the companys current expansion plans, you will need 1,000,000 Riyals every year for the next ten years. When you asked for their opinions, everything goes crazy and as expected, they cant agree about anything. From their presentations, you understand that the current market conditions are as follows:

Stock market:

The stock market has been doing well. The average growth in stock prices is at 10% year over year. The companys stock (RICH) is currently priced at 150 SAR and the dividends per share will be at 3 SAR by the next quarter. Your analysts expect that the average required rate of return for investors in the market is at 8%. The current dividend growth rate for your stock has been 5%.

Bond market:

The bond market is also doing well. The bonds that are mentioned in the presentations are the following three bonds that pay coupons annually:

Bond Term	Principal	Coupon Rate	Discount Rate
One Year	10,000 Riyals	3%	5%
Five Years	10,000 Riyals	8%	10%
Ten Years	10,000 Riyals	8%	12%

Banks and Money Markets:

At the current market conditions, the interest rates offered for savings deposits by the bank is at 1.0% APY. For Certificate of Deposits, the current rate for a 90-day deposit is at 3.0% APY. You also have the option of issuing commercial paper due within 90 days at 1.50% APY.

Here is a summary of the presentations:

The first head of department, Mr. Saeed, has been with the company for a long time. He thinks that the companys stock is overvalued and is proposing to hold the excess money in a savings account to accrue interest. He believes that this would be the safest investment. You proposed that putting the money in the money market would be a better option but he said that he has never done that and doesnt think its a good idea.

The second head of department, Ms. Nourah, is not as experienced as Mr. Saeed but is excited about the future growth of the company. She disagrees with him and thinks that the stock is undervalued. She is proposing to issue greater dividends to investors. She tells you that, by sharing the profits with the shareholders, the company is doing what is best for them. She also thinks that the stock price will increase and investors will have more confidence in the company. If the company needs to raise money in the future, it can issue stock at a later date.

The third head of department, Ms. Jameela, who recently joined the company after working at a consulting firm for 10 years disagrees with them both. She thinks that, instead of focusing on the stock market, the company should diversify its investments by buying bonds. She believes that the bonds found above are excellent investments and that the company should not miss out on this opportunity. And if the company needs money in the future, it can issue commercial paper.

The discussion becomes so heated that you need to intervene. Based on the information provided above, detail the investment strategy that you will approve with appropriate justification for your decision. Keep in mind that you can pick more than one option.

Note: You will need to provide an analysis of all the options provided above including your response to each of the department heads with detailed calculations and rationalizations for your answer. Please refer to the Answering the Assignment Guideline document.

Guide to Answering the Assignment

The following is a guide to help you answer the question in the assignment. You and your team will need to discuss all of the following points to be able to provide a comprehensive answer in the final part of the assignment.

Kindly provide your analysis in the following format and include all calculations in your report. Your report should be in the form of a memo addressed to the heads of the finance departments. Start with an introduction followed by the points below.

Part 1 Analysis of the Stock price

Apply what we learned in the course to assess whether the companys stock price is overvalued, undervalued or appropriate. If you find that it is over- or undervalued, what would you need to change for the stock to be appropriately priced?

Part 2 Analysis of the Bonds

Evaluate each of the bonds provided in the case. Provide the expected price for each of the bonds in addition to the current yields.

Part 3 Analysis of the Bank and Money Market Opportunities

Give your teams opinion on each of the options described in the case. In your analysis, you will need to detail the benefits and disadvantages of each one of them.

Part 4 Conclusion and Recommendations

This should be the bulk of your report. Your team needs to bring together all of the arguments mentioned above. You need to give a detailed response to each of your department heads on whether you agree or disagree with their statements.

You also need to explain how you plan to secure financing for the companys future projects (1,000,000 Riyals each year for the next ten years). To help you brainstorm and organize your thoughts use the following table:

Year	Investment Strategy = 1M/year	Justification
1
2
3
4
5
6
7
8
9
10