Corporate Financial Management Project †Myassignmenthelp.Com

Question: What issues relating to the concept of the time value of money may be important in this decision-making process? Answer: There are various employees of tertiary sector who have proper involvement in offering services. Tertiary sector have three types of services, there is a need to generate their own fund in the form of superannuation funds as if they do not perform any activity under any employer. There are two plans on which basis employees generate their own contribution, these plans are investment choice plan and defined benefit plan. Employees must evaluate various factors before choosing any retirement plan between these two investment choice plan and defined benefit plan. Before making any kind of investment into these plans it is important to acquire clear set of knowledge regarding them and select the appropriate plan accordingly. (Arnold, 2013) Defined benefit plan Defined benefit plan is used to classify the sum of amount that will be receiving by the employee at the starting point of this plan. An amount that is to be received by the employee at the time of retirement is based on the necessity of employee under this plan. Both the parties, employee and employer make contribution of some particular amount and that is according to the salary of an employee, its age and time period of serving or going to be served. (Aslan, 2015)This plan, defined benefit plan is used by the employee to make growth in their earnings. It is to be assumed that final salary plan is an ordinary plan in defined benefit plan that is to be used for retirement to calculate their pension through some essential variables and these are defined as below: Pensionable service In this service, pension is given to an employee based on time duration of employees service. (Bacon, 2010) Pensionable earnings This is considered as the employee pays estimation that will be withdrawn at retirement. Accrual rate It decides that what part of amount an employee is going to be received at the end of year, according to this plan. There is a method to calculate the amount of employees pension in defined benefit plan which is described as follows: (Cox et al., 2013) Time duration of service * Employees pay at the retirement time * Accrual rate Employees of tertiary sector will be received the pension amount that is totally depend upon the time period of service, employees pay and accrual rate. Under this retirement amount, employees are capable to make their own involvement in respect to funds on which basis they can get pension at the time of retirement. Under this plan, employees can only acquire benefit when defined benefit plan is to be executed. This plan is appropriate for the employees of tertiary sector as it involved some benefits regarding taxation. Unfunded defined benefit plan There are two types of defined benefit plan and at the time of executing defined benefit plan employee needs to choose any one between funded defined benefit plan and unfunded defined benefit plan. Under unfunded defined benefit plan employee cannot make any investment or create any asset in the same. And under funded defined benefit plan employee can make investment or create asset through their contribution. When the duration of employee service is completed then employee can generate funds by selling off the invested or asset that is created. Funded defined benefit plan is a major limitation that employee can only get amount at the maturity time but not in advance. Investment choice plan Retirement plan includes this plan i.e. investment choice plan in which employee can open its account with the company in which investment is to be made. Under this plan, employee can make numerous investment or single investment on the whole through the contribution of employee and employer or salary earned in a particular time period. This plan has a benefit that employee can terminate or change its investment into any other option by the affects of some factors. Employees, under this plan are also capable to manage their retirement amount. By choosing this plan employee can make investment according to their choice on which basis they can develop their own portfolio of asset for risk management in which they want to invest. . (Baker and Filbeck, 2013) Employee can use various strategies by means of using this plan. Investment choice plan includes stable funds, trustees fund, secured fund and etc. There are various factors that needs to be taken care of by the employees of tertiary sector for making their involvement in the defined benefit plan or in investment choice plan. Some factors are as under: Rate of Inflation Inflation rate is the rate in which value of money is decreased which increases the living costs. This factor should be considered first at the time of taking decision in respect to making retirement contribution. Inflation rate is considered as the essential element for the long term plans and for the defined benefit plan. Investments in defined benefit plan are made on long term basis and in this condition value of money decreases over period of time. So, as a result for this employees need to increase their retirement contribution. Risk profile In this factor, the level of risk which is taken by the tertiary sectors employee is being considered. The concepts of contribution as well as retirement funds are both different from each other. As compared to the investment choice plan, defined benefit plan seems to be less risky. Defined benefit plan directly connected with the market so it involves less risk and in invest choice plan more risk involves as there are various options for making an investment and some are connected to the equity or market. So, it is important for the employee of tertiary sector to evaluate the risk before making any investment. (Schreiber, 2016). Investment time duration To select contribution plan for retirement, proper time framing of investment that is to be made should be considered first. Employee first needs to decide whether the investment is made for short term basis or for long term. This plan is beneficial for the short duration as well. But on the other side, defined benefit plan is only beneficial for the long duration. So it is to be assumed that investment time duration is an essential tool for making investment. Financial objectives Every individual has its own financial goal. But at the time of deciding investment for the retirement it is important to focus on the financial aspects. It is all related to the employees risk taking capacity as if they want to raise more fund and are willing to take more risk, they would invest in investment choice plan otherwise if they want to get the income of pension at a stable rate then they can select defined benefit plan. (Valentine and Scott, 2011) Time value money and its related issues In this concept, the value of money is decreasing as years passes on in the future. It has an important role in deciding the investment plan for retirement. Regarding the value of money, defined benefit plan and investment choice plan both has separate concept and also uses different term to eliminate the risk. To making appropriate decision regarding the amount of retirement this term can be used. By time value money concept, the exact present amount of contribution for retirement and the amount that is going to be received at the time of retirement is calculated. Random market trends and inflation rate can be factors which provide proper support to the time value money concept in making decision. (Finch, 2010) This method is used to calculate the net value of contribution for the retirement and the amount of pension that will be received in future. The amount that will be received as retirement funds would be accustomed with the rate of inflation. In this method emphasis is made on the issues regarding cash flows (outflow and inflow) of contribution for retirement as well as on the amount that is to be received at the end of superannuation period. (Paramasivan and Subramanian, 2009) Recommendations On the basis of above description it is concluded that there are two investment plans available defined benefit plan and investment choice plan and from which investment choice plan is considered as well customised. For offering highest flexibility regarding executing and designing retirement plan as well as its cash inflow (amount of pension) and outflow (payments), this plan needs to be selected. Investment choice plan is also beneficial for the future in which retirement funds are assured and that cannot be increased. Under investment choice plan, planning regarding future could be enhances on the basis of situation of market. Efficient market hypothesis With the help of efficient market hypothesis, market position of an organization reflects by its commodity price or asset or stock. In another aspect, efficient market hypothesis is considered as the situation in which stock price of an entity or assets or market shares of any organization is identify by collecting the relevant set of information regarding organization (Narayan, Narayan, Popp and Ali, 2015). This hypothesis defines that the prices of stock or assets is at fair value so there is no probability of profit or loss in the stock market. It is identified on the basis of efficient market hypothesis situations and theories that on accordance to the several factors available into the market, price of asset or stock has been decided. Therefore, it is considered as an easy task to choose shares or stocks for investment without implementing any strategies. Earlier, some factors like market trends, past information regarding stocks or shares, market condition, market information h ave not been considered to put the price of stock or assets. On this basis, the stock or assets prices do not make any movement due to changes into the market. (Superannuation: How to deduct superannuation contributions by passive investment trusts, 2013). Pension Fund managers role in managing the portfolio On the basis of above discussion it is analysed that portfolio manager does not face any problem in managing the portfolio in this situation as there are not much changes into the market and it is also assumed that there is not much role of managers in the same. (Darst, 2013) Due to market conditions responsibility of fund manager has been decreased as well as the role of pension fund manager has also been almost vanished. According to the efficient market hypothesis, market trends, past information, etc have not been taken into consideration so there is no need for fund manager. In investment choice plan pension fund manager has a responsibility to update the plan as well as employees portfolio (Baker and Filbeck, 2013). Therefore, it is to be assumed that there is no such situation make existence into the market since into the market there are several factors which need to be taken consideration before involving into the investment for the funds regarding retirement contribution. The situation which is described in the efficient market hypothesis does not exist because forces of market are considered to be very powerful and incorporation of these forces affects the asset or share value. In addition to this, it is concluded on the basis of efficient market hypothesis that all the investors earn same amount of revenue because the price of stocks and assets are at fair value so there is no any possibility of loss and gain and there is no need to manage the portfolio. (Baxamusa, Mohanty and Rao, 2015) At last it is concluded overall that such type of situation, like what efficient market hypothesis described, does not exist into the market and into the investment market so on that basis it is proved that efficient market hypothesis is unproved and vague. (Belloc, 1967) References Aslan, H., 2015. Do Lending Relationships Affect Corporate Financial Policies?.Financial Management, 45(1), pp.141-173. Baxamusa, M., Mohanty, S. and Rao, R., 2015. Information Asymmetry about Investment Risk and Financing Choice.Journal of Business Finance Accounting, 42(7-8), pp.947-964. Cox, S., Lin, Y., Tian, R. and Yu, J., 2013. Managing Capital Market and Longevity Risks in a Defined Benefit Pension Plan.Journal of Risk and Insurance, 80(3), pp.585-620. Arnold, G., 2013.Essentials of corporate financial management. Harlow, England: Pearson. Bacon, F., 2010.Corporate financial management. Acton, MA: Copley Custom Textbooks. Finch, B., 2010.Effective financial management. London: Kogan Page. Paramasivan, C. and Subramanian, T., 2009.Financial management. New Delhi: New Age International (P) Ltd., Publishers. Cox, S., Lin, Y., Tian, R. and Yu, J., 2013. Managing Capital Market and Longevity Risks in a Defined Benefit Pension Plan.Journal of Risk and Insurance, 80(3), pp.585-620. Valentine, T. and Scott, C., 2011.Modern financial and investment planning. Frenchs Forest, N.S.W.: Pearson Australia. Baker, H. and Filbeck, G., 2013.Portfolio theory and management. New York: Oxford University Press. Belloc, H., 1967.On. Freeport, N.Y.: Books for Libraries Press. Darst, D., 2013.Portfolio investment opportunities in managed futures. Hoboken, N.J.: Wiley. Narayan, Paresh Kumar, Narayan, Seema, Popp, Stephan, Ali Ahmed, Huson. (2015). Is the efficient market hypothesis day-of-the-week dependent? Evidence from the banking sector. Applied Economics, pp 1-20. Schreiber, S. (2016). 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