Corporate Financial Management for Investment- MyAssignmenthelp

Question: Discuss about theCorporate Financial Management for Investment Choice. Answer: Introduction Superannuation is described as long-term saving and investment plan that is developed for saving funds for the retirement of an employee. The superannuation plan can be referred to as most effective plan for investing the pension funds for employees as money investors is likely to grow without any tax implications (Smith and Koken, 2011). This report has been developed for analyzing the major factors that should be considered by tertiary sector employees for placing their superannuation funds under defined benefit or investment choice plan. The report also discusses the issues relating to concept of time value of money at the time of making this decision. At last, the report analyses and examines the statement If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin. Factors Impacting the Selection of Superannuation Contributions under Defined Benefit or Investment Choice Plan The tertiary sector employees consists of employees engaged in service sector and is the third piece of three-part economy while the other two are agriculture and manufacturing. The superannuation schemes are highly beneficial for the employees of tertiary sector in order so that they can live their future life without any dependence. The tertiary sector employees are provided with large flexibility for deciding the type of superannuation products and investment as their retirement plan option and secure their retirement life (CCH Australia Staff, 2012). There are mainly two types of plan available for the tertiary sector employees under the superannuation schemes that are defined benefit and investment choice plan. The employees have to develop an adequate understanding of each type of superannuation plan before placing their pension funds. The defined benefit plan is pension plan offered to the employees by the employer is fixed and is pre-determined as it is calculated through the use of formula that is linked to salary, age, and time-period of service. The employees under this plan have not to bear any market risk as all the investment risks are bearded by the employer (Reilly and Estreicher, 2010). The employer is solely responsible for making decisions relating to investments under this type of plan. Thus, the major benefit provided to the employees under this type of plan is that company is in the charge of making investment decisions and no effort is required on the part of the employees. The employees receive their retirement income without any difficulties as overall budgeting decisions are taken by the employer with no involvement of the employees. The tertiary sector employees who do not have adequate time for managing their investment related decisions enjoy a significant benefit under this type of plan. Also, older employees may receive more benefit under this type of plan as the income is determined on the basis of age factor and tenure of service (Gitman et al., 2015). Also, the employer possesses the overall responsibility for funding any type of deficits if occurred under the plan. The market fluctuations do not impact the retirement payout of employees and the inc ome received by them is relatively known by them in advance. However, the plan is associated with several drawbacks that should also be considered by the employees before selecting defined benefit plan to invest their superannuation contributions. The major limitation is that employees do not have the authority to participate in taking investment decisions and thus they are not likely to receive any extra benefit with investing their funds in different type of assets. Also, as overall monitoring of funds is undertaken by the employer it involved huge administration costs. The employees with older age receive large income after retirement under this plan as compared to the younger employees. Also, it becomes mandatory for the employees to make contributions annually irrespective of the income received for that year (Kolb, 2009). On the other hand, investment choice plan is completely different from defined benefit plan as the retirement income under this type of plan cannot be determined in advance because it is not fixed. This type of plan provides complete authority to employees for selecting their investment options in different class of assets for placing their superannuation contributions. The employees are offered different types of investment strategies in investment choice plan such as investing in bonds, stocks, domestic and overseas shares, property and infrastructure (Petty et al, 2015). The major type of investment options provided under the investment choice plan is as follows: Balanced Investment Option: Under this type of option, employees can invest their superannuation fund in shares and the remaining in property, fixed interest and cash. Growth Investment Option: This type of investment plan involves investing 80% to 100% of funds in growth assets such as shares and property. Conservative Investment Option: This involves investing a significant part of the superannuation contribution in cash and fixed interest investments (Smith and Koken, 2011). The employees can select as per their desire the type of investment strategy they would like to select based on the risk and return characteristics of each. The main benefit for tertiary sector employees with this type of plan is that they can receive higher funds as their retirement payout as compared to defined benefit plan. This is because income is not fixed and is dependent mainly on the returns generated by the selected investment strategy. Also, the retirement payout is not impacted by the age of employees as the payout is not based on any formula but the investment option selected (Petty et al., 2015). The main drawback of this type of plan is that employees have to gain the help of professionals for managing their portfolio that can make it time-consuming for them. Also, the plan is associated with risk that can vary the returns generated and as such they can also receive lower returns sometimes depending on the performance of the portfolio selected by them. The employees sh ould also possess adequate knowledge about the different type of investment options and thus they have to invest a significant part of their time for managing their portfolio. Thus, these features of investment choice plan makes it relatively difficult for tertiary sector employees to place their superannuation contributions as they have to themselves manage and monitor their portfolio (Maginn et al., 2007). Thus, these all factors should be considered by the employees at the time of selecting their contributions of superannuation in the defined benefit or investment choice plan. The superannuation funds provide varying range of options for the employees that they can select for investment purpose. The type of plan selected by the tertiary sector employees depend on their financial situation and investment requirements. Importance of Time Value of Money in Decision-Making Process of Placing Superannuation Contributions The time value of money is an important concept for knowing the future worth of an investment by investors. As per this concept, the money today is more worthy as compared to same amount of money in future period of time. This is mainly due to the fact that money losses over its value in coming period of time and therefore it is more desirable to posses it now rather than later due to presence of certain factors such as inflation and others. The concept holds high significance at the time of making financial decisions relating to investment. The time value of money concept states that value of money changes over time and as such the concept is used largely to find the future value of an investment. The investors can find the future value of an investment through applying the discounting and compounding method of time value of money. The present and future value of cash flows can be easily determined through the concept of time value of money. As such, the employees can easily determi ne the amount of money they are likely to receive under the defined benefit plan through analyzing the future worth of their investment under the time value of money principle (Maginn et al., 2007). This can be done through compounding the present amount to future value through the use of compounding factor of time value of money. The employees can also determine the future value of their cash flows under the scheme of investment choice plan. The price of different type of assets selected under investment choice option can be sued to determine the future value of cash-flows through the use of compounding factor of time value of money. Thus, the employees can easily select the type of superannuation plan for their pension program by analyzing the retirement payout they are likely to receive in the future with the use of time value of money principle. Thus, it can be said that the concept of time value of money is highly important for employees to undertake cost-benefit analysis of both the investment plan at the time of taking decisions about placing their superannuation contributions. The concept is a fundament concept used at the time of making investment and other financial de cisions as it easily determines the present and value of money (Fiestas et al., 2010). If the Efficient-Market Hypothesis is True, the Pension Fund Manager Might as well Select a Portfolio with a Pin The pension fund manager holds the responsibility of ensuring that pension schemes operate effectively and the investors realize higher returns. The fund manager makes all the decision relating to the investment and thus aids the employees in effective management and maintenance of their pension funds. The pension fund manager has to develop a portfolio for the employees that provide them maximum pension benefits. For this, the fund manager is required to invest in different type of assets in order to minimize the market risk and thus provide maximum returns to the investors. However, as per the efficient-market hypothesis the market operates in perfect efficient conditions and it is rather impossible to beat the market. The theory states that price of assets provide all the relevant information that is equally available for all the investors. Thus, if the theory holds true, the pension fund manager can easily select a portfolio without analyzing the risk and return characteristics o f different type of assets selected for portfolio development. The theory also popularly known as random walk theory as per which the investors cannot release higher profits more than the market. This is generally not the case as investors have earned higher returns than the market and also the reruns achieved by different investors varies and is not uniform (Bergen, 2011). The theory of efficient market hypothesis suggests that it is very difficult to earn profits by predicting the price movements of assets. The market is truly efficient means that price of assets adjust quickly with the arrival of new information. The price of stocks rapidly adjusts before investors can trade and earn profit from the arrival of new information. However, this does not hold true as investors earn profits by diversifying the market risk through investing in different type of assets such as stocks, bonds etc. This is necessary so that of one type of asset provide lower returns it is managed by good returns obtained from other class of assets and performance of overall portfolio is not affected. The pension fund manager has to diversify the market risk by selecting the most appropriate assets that will provide higher returns to the investors and does not rely on the information available from the asset prices. Thus, it can be stated that efficient market hypothesis does no t hold true for investment decisions (Wendt, 2015). Conclusion The above discussion has inferred that superannuation plans are highly important for tertiary sector employees in order to secure funds for their future life after retirement. The employees should consider the characteristics of all type of superannuation schemes before selecting an individual plan for placing their pension contributions. The concept of time value of money proves to be highly important for employees at the time of taking decisions relating to place their superannuation contributions. The efficient-market hypothesis does not hold true for taking investment decisions relating to the pension fund manager for portfolio development. References Bergen, J.V. 2011. Efficient Market Hypothesis: Is The Stock Market Efficient? Retrieved May 13, 2014, from Available at: https://www.forbes.com/sites/investopedia/2011/01/12/efficient-market-hypothesis-is-the-stock-market-efficient/#4a55338176a6 CCH Australia Staff. 2012. Australian Master Tax Guide. 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