Exploring Different Aspects of the Stock Markets and Analysing the Financial Statements Relating to IHG Organisation (Coursework Sample)

Finance; Financial Markets
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Question 1
a.
The security markets have transitioned into a sophisticated being, characterized by highly spread volatility in the stock market. Investments are exposed to great uncertainties with the investors opting for the stocks having risk adjustable returns as a means to diversify and get assured of high returns. A market full of uncertainties is explained by the Efficient Market Hypothesis (EMH) as an efficient markets no investor is sure of stock prices, effective capital allocation/channeling equal exposure to the financial information hence resulting to a fair game in the security markets CITATION Fam04 \l 1033 (Fama & French, 2004). Multiple scholars have employed the EMH concept in explaining the efficiency extents of the security markets. How effective and true is the EMH? Based on the correlation, the EMH asserts that the stocks prices reflect all the available information in the market which includes the information on the economic changes, company performance, management and changes in the dividend policy CITATION Rob14 \l 1033 (Robert R. Johnson, 2014).
Using both past and present information, an efficient market is therefore said to reflect fully all the available information on the market hence the stocks shall be appropriately priced. Based on the present market uncertainties caused by the changes in the economic factors, the investors can employ the use of the available information to make sound investment decision hence assuring higher returns. This basis supports the usefulness and concept of the EMH in dealing with the market being as on buying stocks, the investors can easily use the publicly available information to ensure receiving fair returns aligned with a fair combination of risks. In adherence to the corporate laws, Neglection of the publicly available information about the market could lead to unfair market practices and loss from the lack of market consideration in the investment decision making CITATION Pha15 \l 1033 (Phan, et al., 2015). The EMH, therefore, stands out as an effective tool for uncovering the market anomalies and assessing the value or price of the stocks.
b.
Focusing on the behavioral economists perspectives, the EMH concept has received numerous criticisms following the ultimate focus on the available information as the core source of security price determinant. Following investor's curiosity, overconfidence and pessimistic views, the publicly available information portray biased being whereby the available market information fails to reflect correctly the market status CITATION Gre09 \l 1033 (Gregoriou, 2009). Investors can, therefore, use wrong information that may result in unsound decision making. This argument disputes the EMH both theoretically and empirically as the third parties influencing the information available may employ malpractices to push the investor into buying the stocks expensively for their benefits characterized by high profits. Fama & French (2004) affirms to the uncertainty of the financial markets but disputes the EMH by asserting that risk is the utmost determinant of the stocks prices in the market by employing beta in calculating the stock risks.
In this case, the available information is not the utmost influence on the stock value but considers the risks available in determining the stocks value. This is an argument the ultimately support considering the fact the fact that information has been used in valuing portfolios but has portrayed diverse outcome in the end due to lack of exclusive analysis of the stocks. With risk as the major threat, its evaluation is prominent to sound investment decision making. This concept is backed by the efficient frontier, a concept that disputes the EMH and seeks to establish an efficient combination of stock portfolios that would assure maximum returns plotted in a graphic appearance CITATION Mar52 \l 1033 (Markowitz, 1952).
Question 2
Fundamental analysis
In this case I choose Intercontinental Hotel Group (IHG) as my investment stock. The stock is currently valued at 39.09, an increase by 0.37% from its previous reading. IHG is a British-based multinational Hotel that has grown over the years having hundreds of branches and affiliate hotels across the globe. In the hospitality industry, IHG faces stiff competition from Multinational hotels such as; Starwood Hotels & Resorts and Wyndham from which IHG has portrayed a stable performance ranking CITATION IHG14 \l 1033 (IHG, 2015). From the IHG 2015 financial statements, we shall calculate and analyze IHGs financial ratios, the financial status reflectors that shall enable sound decision making on investment;
* Current ratio=current assets/current liabilities
624000000/943000000
= 0.66
* Food inventory turnover
=cost of foods used/ average food inventory
= 83000000/3000000
=27.7
* Property and equipment turn over= [beginning + ending]/2
[1169+741]/2
=955
* Asset turn over= revenue/average total assets
1858000000/2818000000= 0.65
* Return on asset= net income/average total asset
=392000000/2818000000
= 1.4
* Return on owners equity=net income/average owners equity
=392000000/717000000
= 0.55
* Earnings per share= net income/ average common share outstanding
=392 000000/ 236100000=1.66
Evaluating the current ratio of IHG, the Company depicts a healthy being as it can comfortably meet its prompt/ current financial obligation for the next one year. Having the current ratio at 0.66 or 33/50 shows that IHG shall be able to pay its bills on time and also have sufficient funds to use in business development CITATION Wil13 \l 1033 (Wild, KenShaw, & Chiapetta, 2013). As an investor, the firm is worth investing in as IHG is away from liquidity risks and maximization of the stakeholder’s wealth is guaranteed. Besides, other than being able to meet the current obligations, IHG also portrays a highly profitable pattern as seen on the return on assets and return on equity as IHG poses high rate of return indicating profitability on its practices CITATION Rom12 \l 1033 (Weil, Schipper, & Francis, 2012). IHG is worth investing as the profitability and returns can be seen from the earnings per share as the returns per share bought can be seen and also compared to the core competitors of the company. Having the ROA at 1.4 also depicts effective management of the firm as the management strives to maximize the stakeholder’s wealth CITATION Jef15 \l 1033 (Madura, 2015). In addition to IHGs efficiency, the turnover ratios from the assets and the inventory turnover, the reports show great potential for improvement in the efficiency of production practices, credit sales management and provision of quality services CITATION Rom12 \l 1033 (Weil, Schipper, & Francis, 2012). IHG is, therefore, worth investing in following the financial health depicted from the financial statement analysis.
Technical analysis
OBV Chart
Using the On Balance Volume indicator, the OBV line crossovers of the IHG buy/sell indicators portray a healthy being with the previous closing being at 0.37 lower than today’s reading. With this upward increase in the price, it is succinct that the volume is ought to increase with more people buying more of IHGs stocks. See the OBV chart below
ADX chart
The OBV chart is supported by the ADX chart to ascertain the strength of the IHG stock price by evaluating the period that portrays its utmost value strength. From the IHG ADX chart it is succinct that the IHG stock price is trending upwards CITATION Sto16 \l 1033 (Stockchart.com, 2016).
Accumulative/Distribution Line
Based on the market information we intend to assess the demand and supply of the IHG stocks using the accumulative distribution line that indicates the flow of money onto buying and from selling the IHG stocks. The demand for the IHG stocks is competitively increasing with a few investors opting to sell their IHG stocks CITATION Fin16 \l 1033 (Finance Yahoo, 2016). This portrays the great trust the market holds onto the IHG performance and are sure of great profitability in the future.
Aroon Index
The IHG tend are not on their highest price, but it is performing well thus using the Aroon's indicator chart, IHGs stock price trend is established with the stocks Portraying a consistent
The price increase i.e. Aroon upwards. Based on this portrayal, the performance of the stocks is projected to increase in the future guaranteeing profitability CITATION Fin16 \l 1033 (Finance Yahoo, 2016).
Question 3
Investing in the mutual funds such as the pension plans or the index funds are all geared to maximizing the investor’s wealth whereby the most effective strategies are embraced to ensure risk minimization while maximizing profitability. The performance of the investment portfolios is, therefore, important with different measures being considered as the determinants of performance in portfolios. These performance measures include the beta, alpha, standard deviation, Sharpe ratios and the independent rating. The Beta is employed in measuring the portfolios volatility about another market index that is the investments exposure to volatility in relation to the market index CITATION Mar52 \l 1033 (Markowitz, 1952). With a positive beta, it is an indication of high volatility whereas with low volatility, it is an indication of low exposure to risks, hence advantageous as a guide to making an investment. The investors focus on maximizing their returns h...