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.

The company's stock price is overvalued as the intrinsic price of SAR 100 is lower than market value of SAR 150. Therefore, if the company reduces the required rate of return from 8% to 7%, the stock will be appropriately valued.

Analysis of the Bonds:

C=10000*3% = 300

Price of the (one year bond) = C*1-(1+r)-n /r+ F/(1+r) n

Price of the one-year bond = 300*1-(1+0.05)-1/0.05 +10000/ (1+0.05)1= 9809.524 SAR

Current Yield = Coupon Amount/ Bonds current price

Current Yield =300/9809.524*100=3.06%

C=10000*8% = 800

Price of the (five years bond) = C*1-(1+r)-n /r+ F/(1+r) n

Price of the five years bond = 800*1-(1+0.1)-5 /0.1 +10000/ (1+0.1)5 = 9241.843 SAR

Current Yield = Coupon Amount/ Bonds current price

Current Yield = 800/9242.843*100=8.66%

C=10000*8% = 800

Price of the (ten years bond) = C*1-(1+r)-n /r+ F/(1+r) n

Price of the ten years bond =800*1-(1+0.12)-10/0.12+10000/ (1+0.12)1 =7739.911 SAR

Current Yield = Coupon Amount/ Bonds current price

Current Yield = 800/7739.911*100 = 10.44%

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.

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.