There is a strong relationship among the savings and economic growth of the companies as well as the individuals. This is the main thing why individuals always try to save high amount of money in order to invest them accordingly for their future. There is numerous investment vehicles in which an organization can invest in different parts of the world (Hastings and Gross, p. 45). A salaried person saves a substantial amount for their savings, which they want to invest at a place from where they get an effective amount of money. However, the choice of investment usually depends upon the inner mentality and nurture of the individual. Investment should be done on the basis of yield and on the basis of managing the financial risk in a best possible manner. There are two parts of this assignment in which first one pertains to the investment in a retirement plan or an insurance plan, while the other one is associated with investing the money in a specific stock of a company. The assignment will be covering up in different aspects, like introduction, analysis and findings and conclusion.
Analysis & Findings
The first scenario of the assignment depending upon the intention of the investor itself, and according to the scenario there is a sum of money that has been saved by an individual worth $ 500, 000. There are two different approaches from which the individual is advised to choose any one. The choices are as follows
– Leave everything on the pension life insurance company
– Managing the wealth accordingly by yourself
Apparently, both of these options finds effective and interesting for the sake of an individual, as far as parking the money in the stocks of the company is concerned, but the options are mutually exclusive, and it is required to select any one option from this. It is required to analyze the pros and cons of each of the option to select the better one (Maheshwari, p. 56)
Pension Life Insurance Company is an effective investment vehicle and options for the salaried class individuals, because they have limited earnings in their whole life. Pension Life Insurance is safe option in which the level of risk would be very low, which is the most interesting advantage of this investment option. However, there is disadvantage as well that specifically associated with the investment in the pension life insurance, which is that these companies usually bound the invested amount of the individuals for a minimum of 10 years. In the meanwhile, investor is not allowed to withdraw any of the amounts, however in case of termination of investment contract before the actual maturity; a large sum of money would be subtracted from the principle amount. Fox example, if the selected individual has $ 500, 000 cash in hand, and wanted to invest for at least 10 years. After 10 years the individual will entitle to receive an investment inflow of 750, 000 however in case of early termination of contract substantial amount will be subtracted from $ 500, 000.
The second option, the individual has is managing their investment portfolio as per his own intension. This particular option is bit risky, as individual might not have the idea of investment; however the basic advantage of this option is that the investor can withdraw any amount which they are wishing to withdraw each year.
It is recommended to the investor to the investor to go with the second option of investment, and should park their money in the treasury stocks of the United States, in which the amount of embedded risk would be very low. Let’s say, the individual would like to withdraw an amount of 12, 000 $ per year for their usage. According to the analysis, it is found that the treasury rate is 2. 42% for 10 years of investment.
= $ 500, 000 * 2. 42% = 12, 100 $ (1 Year)
The return amount including the withdraws is $ 621, 116, which is lower than that of the amount of Pension Plan Investment, but it has low burden on the investor because he can withdraw a sum of money as per their intension in every year. Therefore, it is requested to the investor to go with the second option instead of the 1st one, as it is convenient one for their future consequences.
In this part, it is required to select two companies which are close competitors to each other. The two companies which have been taken into consideration are Microsoft Inc and IBM (Swensen, p. 23). Microsoft is selected for investment, while IBM used for not investing the money in it. Microsoft Inc is an American based multinational corporation with its headquartering located in Washington, the United States. Windows, office, Xbox and Skype are some of the major products of the company. Microsoft Inc earned net revenue of US$ 86. 83 billion in the financial year 2014. On the other hand, International Business Machine Corporation (IBM) is yet another American multinational technological company. It manufactures hardware and software, hosting and consulting ranging from the mainframe computers of nanotechnology. The company earned net revenue of US$ 99. 571 billion in the year 2013. There are certain ratios that will be taken into account for the same analysis
Price to Earnings Ratio
Price to earnings ratio is a type of ratio that used to analyze the investment stance of a company, and how much expectation is for the companies in particular. It is an important investment ratio that uses by the investors to analyze the power accordingly
The P/E of Microsoft was 19. 72% in the financial year 2010, and then decreased to a level of 12. 07% in the year 2011. In the year 2013 and 2014, the P/E ratios of the company were also in a good stage showing a percentage of 14. 51% and 18. 08% respectively. On the other hand, the P/E of IBM was 13. 20% in the year 2010 which decreased to a level of 12. 75% in the year 2011. P/E of the company in the year 2013 and 2014 were 13. 62% and 11. 81% respectively. It is showing that Microsoft is more towards investor’s satisfaction and effectiveness.
Price to Sales Ratio
Price to sales ratio is yet another important ratio that associated with analyzing the proportion of price to the sales. The Price to Sales (P/S) of Microsoft is more effective than that of IBM, showing that the P/S of the company in the financial year 2014 was 3. 75% while it was 2. 125% for IBM in the same year. It is showing that Microsoft is more worthwhile and financially active as compared to IBM in terms of generating price through their sales revenue.
Price to Book Value
Price to Book Value is yet another important ratio used for investment. The Price to Book Value of Microsoft Inc in the tear 2014 was 3. 595% while it was 10. 13% for IBM in the financial year 2014.
The Dividend Yield of Microsoft is again in higher stake as compared to IBM, as the Dividend Yield of Microsoft In was 2. 59% in the year 2014, while it was 2% for IBM in the same year.
Financial Highlights of IBM, retrieved from http://ycharts. com/companies/IBM/dividend_yield, Accessed on 2014-Oct-25th, (2014)
Financial Highlights of Microsoft Inc, retrieved from http://ycharts. com/companies/MSFT/dividend_yield , Accessed on 2014-Oct-25th, (2014)
Hastings, A, and Louis J Gross. Encyclopedia Of Theoretical Ecology. Berkeley: University of California Press, 2012. Print.
Maheshwari, Yogesh. Managerial Economics. New Delhi: Prentice-Hall of India, 2005. Print.
Swensen, David F. Pioneering Portfolio Management. New York: Free Press, 2000. Print.