|
Part 2 |
|
|
First Interest Payment |
1,33,333.33 |
|
Part 3 |
|
|
First principle payment |
1,06,825.91 |
|
Part 4 |
|
|
After making monthly payment for 3 Years |
|
|
Amount owed after 36 instalment payment |
1,55,34,059.74 |
|
Part 5 |
|
|
Amount left for repayment at the end of year 3 |
1,55,34,059.74 |
|
Cost of refinance |
250000 |
|
Total amount to be repaid |
1,57,84,059.74 |
|
Interest (Annual) |
7% |
|
Interest (monthly) |
0.583% |
|
Years to Maturity |
7 |
|
Total no. of instalments |
84 |
|
Cumulative PVF |
67.266 |
|
Instalment |
2,34,651.83 |
|
Previous Instalment |
2,40,159.24 |
|
Difference in loan payments |
5,507.41 |
|
PV of the difference in loan payment |
3,70,460.69 |
|
Assumption: |
|
|
It is assumed that the 7% interest rate is per annum and the repayment of loan is monthly. |
|
|
Part 6 |
|
|
Interest (annually) |
8% |
|
Interest (quarterly) |
2% |
|
Amount of loan |
2,00,00,000.00 |
|
Years to maturity |
10 |
|
No. of instalments |
40 |
|
Cumulative PVF |
28.35547924 |
|
Instalment |
7,05,331.05 |
|
Part 7 |
|
|
Amount of loan after 3 years of instalments |
15576301.57 |
|
Part 8 |
|
|
Annual percentage rate on ten year loan |
8% |
|
Part 9 |
|
|
Effective Annual rate |
(1+i/n)^n-1 |
|
I |
8% |
|
N |
12 |
|
Effective Annual rate |
8.30% |
|
Assumption: |
|
|
It is assumed that the 8% interest rate is per annum. |
|
Face Value of Bond |
100 |
|
|
Realisable value |
78.12 |
|
|
Maturity |
10 years |
|
|
Part a |
||
|
FV |
100 |
|
|
PV |
78.12 |
|
|
N |
10 |
|
|
PV |
= |
FV/(1+r)^n |
|
78.12 |
= |
100/(1+r)^10 |
|
(1+r)^10 |
= |
1.2800819 |
|
1+r |
= |
1.0249998 |
|
R |
= |
0.0249998 |
|
R |
= |
2.50% |
|
Part b |
||
|
FV |
$ 100.00 |
|
|
R |
3.50% |
|
|
N |
9 |
|
|
PV |
= |
FV/(1+r)^n |
|
PV |
= |
$ 73.37 |
|
Loss |
= |
$ 4.75 |
|
Part c |
||
|
C |
= |
$ 25.00 |
|
T |
= |
9 |
|
R |
= |
3.50% |
|
F |
= |
$ 1,000.00 |
|
Bond value |
= |
C*[{1-1/(1+r)^t}/r]+[F/(1+r)^t |
|
Bond Value |
= |
$ 923.92 |
|
Loss |
= |
$ 76.08 |
|
Comparison |
||
|
Part b |
||
|
Loss Percentage |
= |
6.08% |
|
Part c |
||
|
Loss percentage |
= |
8.23% |
|
Price of shares today |
||
|
D1 |
3.28 |
|
|
G |
5% |
|
|
Ke |
11% |
|
|
Po |
= |
D1/(Ke-g) |
|
Po |
= |
54.67 |
|
Rate of return |
||
|
D1 (Expected dividend) |
3.7 |
|
|
Po |
54.67 |
|
|
G |
0.05 |
|
|
Ke |
? |
|
|
Ke |
= |
(D1/Po)+g |
|
Ke |
= |
12% |
Janet Yellen retires as Chairman of the Federal Reserve and Arnold Schwarzenegger is appointed to take her place.
Systematic Risk
- Martha Stewart is convicted of insider trading and is sentenced to prison.
Unsystematic risk
- An OPEC embargo raises the world market price of oil.
Systematic Risk
- A major consumer products firm loses a product liability case.
Unsystematic Risk
- The US Supreme Court rules that no employer can lay off an employee without first giving 30 days’ notice.
Systematic Risk.
|
Initial investment |
85,000.00 |
||||
|
Useful Life |
5Years |
||||
|
Cost of Capital |
0.12 |
||||
|
Year |
Cash Flows |
||||
|
1.00 |
18,000.00 |
||||
|
2.00 |
22,500.00 |
||||
|
3.00 |
27,000.00 |
||||
|
4.00 |
31,500.00 |
||||
|
5.00 |
36,000.00 |
||||
|
Part a |
|||||
|
Payback Period |
|||||
|
Year |
Cash Flows |
Cumulative cash Flows |
|||
|
1.00 |
18,000.00 |
18,000.00 |
|||
|
2.00 |
22,500.00 |
40,500.00 |
|||
|
3.00 |
27,000.00 |
67,500.00 |
|||
|
4.00 |
31,500.00 |
99,000.00 |
|||
|
5.00 |
36,000.00 |
1,35,000.00 |
|||
|
Payback Period |
= |
3.56 |
|||
|
Part b |
|||||
|
Year |
Cash Flows |
PVF @ 12% |
PV of cash flows |
||
|
– |
-85,000.00 |
1.00 |
-85,000.00 |
||
|
1.00 |
18,000.00 |
0.89 |
16,071.43 |
||
|
2.00 |
22,500.00 |
0.80 |
17,936.86 |
||
|
3.00 |
27,000.00 |
0.71 |
19,218.07 |
||
|
4.00 |
31,500.00 |
0.64 |
20,018.82 |
||
|
5.00 |
36,000.00 |
0.57 |
20,427.37 |
||
|
NPV |
8,672.54 |
||||
|
Part c |
|||||
|
Year |
Cash Flows |
PVF @ 20% |
PV of cash flows |
PVF @ 15% |
PV of cash flows |
|
– |
-85,000.00 |
1.00 |
-85,000.00 |
1.00 |
-85,000.00 |
|
1.00 |
18,000.00 |
0.83 |
15,000.00 |
0.87 |
15,652.17 |
|
2.00 |
22,500.00 |
0.69 |
15,625.00 |
0.76 |
17,013.23 |
|
3.00 |
27,000.00 |
0.58 |
15,625.00 |
0.66 |
17,752.94 |
|
4.00 |
31,500.00 |
0.48 |
15,190.97 |
0.57 |
18,010.23 |
|
5.00 |
36,000.00 |
0.40 |
14,467.59 |
0.50 |
17,898.36 |
|
-9,091.44 |
1,326.93 |
||||
|
IRR |
= |
16% |
The investment can be done in this project as NPV of the project is positive and the IRR is more than the company’s rate of return. The company can implement the project as the NPV and IRR both have positive implication on the acceptability of the project. Positive NPV shows that companies’ profits will increase gradually with the acceptance of the project.
|
Discount rate |
15% |
||||
|
Part a |
|||||
|
Year |
Renovate (X) |
Replace (Y) |
PVF @ 15% |
PV of cash flows of X |
PV of cash flows of Y |
|
0 |
-90,00,000.00 |
-10,00,000.00 |
1 |
-90,00,000.00 |
-10,00,000.00 |
|
1 |
35,00,000.00 |
6,00,000.00 |
0.869565217 |
30,43,478.26 |
5,21,739.13 |
|
2 |
30,00,000.00 |
5,00,000.00 |
0.756143667 |
22,68,431.00 |
3,78,071.83 |
|
3 |
30,00,000.00 |
4,00,000.00 |
0.657516232 |
19,72,548.70 |
2,63,006.49 |
|
4 |
28,00,000.00 |
3,00,000.00 |
0.571753246 |
16,00,909.09 |
1,71,525.97 |
|
5 |
25,00,000.00 |
2,00,000.00 |
0.497176735 |
12,42,941.84 |
99,435.35 |
|
NPV |
11,28,308.89 |
4,33,778.78 |
|||
|
Ranking |
|||||
|
Renovate |
I |
||||
|
Replace |
II |
||||
|
Part b |
|||||
|
Year |
Renovate (X) |
PVF @ 20% |
PV of Cash Flows |
PVF @ 25% |
PV of Cash Flows |
|
0 |
-90,00,000.00 |
1.00 |
-90,00,000.00 |
1.00 |
-90,00,000.00 |
|
1 |
35,00,000.00 |
0.83 |
29,16,666.67 |
0.80 |
28,00,000.00 |
|
2 |
30,00,000.00 |
0.69 |
20,83,333.33 |
0.64 |
19,20,000.00 |
|
3 |
30,00,000.00 |
0.58 |
17,36,111.11 |
0.51 |
15,36,000.00 |
|
4 |
28,00,000.00 |
0.48 |
13,50,308.64 |
0.41 |
11,46,880.00 |
|
5 |
25,00,000.00 |
0.40 |
10,04,693.93 |
0.33 |
8,19,200.00 |
|
NPV |
91,113.68 |
NPV |
-7,77,920.00 |
||
|
IRR |
20.49% |
||||
|
Year |
Replace (Y) |
PVF @ 30% |
PV of Cash Flows |
PVF @ 40% |
PV of Cash Flows |
|
0 |
-10,00,000.00 |
1.00 |
-10,00,000.00 |
1.00 |
-10,00,000.00 |
|
1 |
6,00,000.00 |
0.77 |
4,61,538.46 |
0.71 |
4,28,571.43 |
|
2 |
5,00,000.00 |
0.59 |
2,95,857.99 |
0.51 |
2,55,102.04 |
|
3 |
4,00,000.00 |
0.46 |
1,82,066.45 |
0.36 |
1,45,772.59 |
|
4 |
3,00,000.00 |
0.35 |
1,05,038.34 |
0.26 |
78,092.46 |
|
5 |
2,00,000.00 |
0.27 |
53,865.81 |
0.19 |
37,186.89 |
|
NPV |
98,367.06 |
NPV |
-55,274.59 |
||
|
IRR |
36% |
||||
|
Ranking |
|||||
|
Renovate |
II |
||||
|
Replace |
I |
These rankings give mixed signals as NPV is the difference between initial investment and present value of cash inflows and IRR is the rate at which PV of cash outflows (Initial Investment is equal to Present value of cash inflows (Titman, Keown, & Martin, 2017)..
|
Year |
Project A |
Project B |
Project C |
Project D |
Project E |
|
– |
-20,000.00 |
-6,00,000.00 |
-1,50,000.00 |
-7,60,000.00 |
-1,00,000.00 |
|
1.00 |
3,000.00 |
1,20,000.00 |
18,000.00 |
1,85,000.00 |
– |
|
2.00 |
3,000.00 |
1,45,000.00 |
17,000.00 |
1,85,000.00 |
– |
|
3.00 |
3,000.00 |
1,70,000.00 |
16,000.00 |
1,85,000.00 |
– |
|
4.00 |
3,000.00 |
1,90,000.00 |
15,000.00 |
1,85,000.00 |
25,000.00 |
|
5.00 |
3,000.00 |
2,20,000.00 |
15,000.00 |
1,85,000.00 |
36,000.00 |
|
6.00 |
3,000.00 |
2,40,000.00 |
14,000.00 |
1,85,000.00 |
– |
|
7.00 |
3,000.00 |
13,000.00 |
1,85,000.00 |
6,000.00 |
|
|
8.00 |
3,000.00 |
12,000.00 |
1,85,000.00 |
72,000.00 |
|
|
9.00 |
3,000.00 |
11,000.00 |
84,000.00 |
||
|
10.00 |
3,000.00 |
10,000.00 |
|||
|
PVF @ 15% |
PV of A |
PV of B |
PV of C |
PV of D |
PV of E |
|
1.00 |
-20,000.00 |
-6,00,000.00 |
-1,50,000.00 |
-7,60,000.00 |
-1,00,000.00 |
|
0.87 |
2,608.70 |
1,04,347.83 |
15,652.17 |
1,60,869.57 |
– |
|
0.76 |
2,268.43 |
1,09,640.83 |
12,854.44 |
1,39,886.58 |
– |
|
0.66 |
1,972.55 |
1,11,777.76 |
10,520.26 |
1,21,640.50 |
– |
|
0.57 |
1,715.26 |
1,08,633.12 |
8,576.30 |
1,05,774.35 |
14,293.83 |
|
0.50 |
1,491.53 |
1,09,378.88 |
7,457.65 |
91,977.70 |
17,898.36 |
|
0.43 |
1,296.98 |
1,03,758.62 |
6,052.59 |
79,980.61 |
– |
|
0.38 |
1,127.81 |
4,887.18 |
69,548.35 |
2,255.62 |
|
|
0.33 |
980.71 |
3,922.82 |
60,476.83 |
23,536.93 |
|
|
0.28 |
852.79 |
3,126.89 |
23,878.04 |
||
|
0.25 |
741.55 |
2,471.85 |
– |
||
|
NPV |
-4,943.69 |
47,537.04 |
-74,477.85 |
70,154.48 |
-18,137.21 |
Project A, C and E have negative NPV. Hence, we can accept project B and D.
|
Part a |
(Amount in $) |
|||||
|
Year |
Alpha (Cash Flows) |
Cumulative cash Flows |
Beta (Cash Flows) |
Cumulative cash Flows |
Gamma (Cash Flows) |
Cumulative cash Flows |
|
0 |
-15,00,000.00 |
-15,00,000.00 |
-4,00,000.00 |
-4,00,000.00 |
-75,00,000.00 |
-75,00,000.00 |
|
1 |
3,00,000.00 |
-12,00,000.00 |
1,00,000.00 |
-3,00,000.00 |
20,00,000.00 |
-55,00,000.00 |
|
2 |
5,00,000.00 |
-7,00,000.00 |
2,00,000.00 |
-1,00,000.00 |
30,00,000.00 |
-25,00,000.00 |
|
3 |
5,00,000.00 |
-2,00,000.00 |
2,00,000.00 |
1,00,000.00 |
20,00,000.00 |
-5,00,000.00 |
|
4 |
4,00,000.00 |
2,00,000.00 |
1,00,000.00 |
2,00,000.00 |
15,00,000.00 |
10,00,000.00 |
|
5 |
3,00,000.00 |
5,00,000.00 |
-2,00,000.00 |
0 |
55,00,000.00 |
65,00,000.00 |
|
Pay Back period |
3.50 |
2.50 |
3.33 |
|||
If cut off payback is 3 years then Beta is chosen and if cut of is 4 years then all the three can be accepted.
Beta is to be chosen if the company wants shortest payback period.
|
Part d |
||||||
|
Year |
Alpha (Cash Flows) |
PVF @ 15% |
PV of Cash Flows |
Cumulative Cash Flows |
||
|
0 |
-15,00,000.00 |
1.00 |
-1500000 |
-1500000 |
||
|
1 |
3,00,000.00 |
0.87 |
260869.5652 |
-1239130.435 |
||
|
2 |
5,00,000.00 |
0.76 |
378071.8336 |
-861058.6011 |
||
|
3 |
5,00,000.00 |
0.66 |
328758.1162 |
-532300.4849 |
||
|
4 |
4,00,000.00 |
0.57 |
228701.2982 |
-303599.1867 |
||
|
5 |
3,00,000.00 |
0.50 |
149153.0206 |
-154446.1661 |
||
|
Discounted payback Period |
0 |
|||||
|
Year |
Beta (Cash Flows) |
PVF @ 15% |
PV of Cash Flows |
Cumulative cash flows |
||
|
0 |
-4,00,000.00 |
1.00 |
-400000 |
-400000 |
||
|
1 |
1,00,000.00 |
0.87 |
86956.52174 |
-313043.4783 |
||
|
2 |
2,00,000.00 |
0.76 |
151228.7335 |
-161814.7448 |
||
|
3 |
2,00,000.00 |
0.66 |
131503.2465 |
-30311.49832 |
||
|
4 |
1,00,000.00 |
0.57 |
57175.32456 |
26863.82624 |
||
|
5 |
-2,00,000.00 |
0.50 |
-99435.34706 |
-72571.52082 |
||
|
Discounted payback Period |
0 |
|||||
|
Year |
Gamma (Cash Flows) |
PVF @ 15% |
PV of Cash Flows |
Cumulative cash flows |
||
|
0 |
-75,00,000.00 |
1.00 |
-75,00,000.00 |
-75,00,000.00 |
||
|
1 |
20,00,000.00 |
0.87 |
17,39,130.43 |
-57,60,869.57 |
||
|
2 |
30,00,000.00 |
0.76 |
22,68,431.00 |
-34,92,438.56 |
||
|
3 |
20,00,000.00 |
0.66 |
13,15,032.46 |
-21,77,406.10 |
||
|
4 |
15,00,000.00 |
0.57 |
8,57,629.87 |
-13,19,776.23 |
||
|
5 |
55,00,000.00 |
0.50 |
27,34,472.04 |
14,14,695.81 |
||
|
Discounted payback Period |
4.48 |
If cut off period is 4years then none of the project is accepted.
Beta should be rejected, but if company uses payback analysis then can be accepted.
Gama can be accepted, but might be rejected if company uses payback analysis.
- Quick ratio measures the short term liquidity of the company. The ratio defines the company’s most liquid assets which can be used to repay the accounts payables of the company.
- Cash ratio signifies the cash available with the entity to repay its outstanding amounts and current liabilities. In short it shows the cash available in hand and at bank.
- The capital intensity ratio signifies the amount invested by us will generate how much return in comparison to sales of the company.
- Total asset turnover ratio shows the ratio between firm’s total assets and sales (Revenue).
- Equity multiplier represents the amount of leverage for the investors of the firm in equity; it measures the worth of firm assets for the benefit of investors.
- Long-term Debt Ratio: Long-term debt ratio shows the ration between firms debt and equity component.
- Times interest earned ratio shows a relation between the firms operating earnings and current interest obligations.
- Profit margin shows the percentage of return over sales.
- Return on assets shows the percentage of profit in comparison to total assets.
- Return on equity shows the relation between the firms profit and owners’ equity. (Barr & McClellan, 2018).
- Price-earnings ratio shows the ratio between the market price and EPS of the shares.
|
Part a |
|||
|
Rf |
4% |
||
|
Rm |
12% |
||
|
Name of Company |
Investment ($ Million) |
Beta |
Rate of Return |
|
Fire |
2 |
0.85 |
10.80% |
|
Water |
3 |
1.25 |
14.00% |
|
Air |
5 |
1.6 |
16.80% |
|
Total |
10 |
||
|
Part b |
|||
|
Rate of Return of portfolio |
14.76% |
||
|
Part c |
|||
|
Beta of Portfolio |
1.345 |
||
|
Rate of Return using CAPM |
14.76% |
||
|
Part d |
|||
|
Name of Company |
Investment ($ Million) |
Beta |
Rate of Return |
|
Fire |
0 |
0.85 |
10.80% |
|
Water |
4 |
1.25 |
14.00% |
|
Air |
6 |
1.6 |
16.80% |
|
Total |
10 |
||
|
Rate of Return of Portfolio |
15.68% |
||
|
Weighted Beta |
1.46 |
||
|
Rate of Return of Portfolio using CAPM |
15.68% |
The above change indicates that if the investment in the Fire company is called by the investor then the return is increasing and risk and return are positively correlated that means that the risk will also increase.
References:
Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher education. John Wiley & Sons.
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial management: Principles and applications. Pearson.
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