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# FIN 200 Business Finance And Group Assignment

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• Course Code: FIN 200
• University: University Of Phoenix
• Country: United States

## Question:

1. com Corporation is building a \$25 million office building in Adelaide and is financing the construction at an 80 % loan-to-value ratio, where the loan is in the amount of \$20,000,000. This loan has a ten-year maturity, calls for monthly payments, and is contracted at an interest rate of 8%.

Using the above information, answer the following questions.

1. What is the monthly payment?
2. How much of the first payment is interest?
3. How much of the first payment is principal?
4. How much will Casino.com Corporation owe on this loan after making monthly payments for three years (the amount owed immediately after the thirty-sixth payment)?
5. Should this loan be refinanced after three years with a new seven-year 7 per cent loan, if the cost to refinance is \$250,000? To make this decision, calculate the new loan payments and then the present value of the difference in the loan payments.
6. Returning to the original ten-year 8 per cent loan, how much is the loan payment if these payments are scheduled for quarterly rather than monthly payments?
7. For this loan with quarterly payments, how much will Casino.com Corporation owe on this loan after making quarterly payments for three years (the amount owed immediately after the twelfth payment)?
8. What is the annual percentage rate on the original ten-year 8 % loan?
9. What is the effective annual rate (EAR)on the original ten-year 8 % loan?

### 1.1 Depicting the monthly payment:

 Particulars Value Loan amount \$ 20,000,000 Tenure 120 Interest rate 0.67% Monthly payment \$ 242,655

### 1.2 Depicting how much is the first payment interest:

 Particulars Value Loan amount \$ 20,000,000 Interest rate 0.67% First payment is interest \$ 133,333

### 1.3 Depicting how much is the first payment is principal:

 Particulars Value Monthly payment \$ 242,655 First payment is interest \$ 133,333 First payment is principal \$ 109,322

### 1.4 Depicting how much money is owed by corporation after making monthly payments:

 Particulars Value Instalments \$ 242,655 Interest rate 0.67% Time 84 Total loan amount owed \$ 15,568,577.62

### 1.5 Depicting should the loan be refinanced after three years:

 Particulars Value Loan amount \$15,568,578 Tenure 84 Interest rate 0.58% Refinance cost \$250,000 Instalments \$242,655 Monthly loan payments \$234,972 Difference \$7,684 Time 84 rate 0.58% PV \$ 509,096

### 1.6 Depicting how much is the loan payment if these payments are scheduled for quarterly rather than monthly payments:

 Particulars Value Building value \$ 25,000,000 Loan amount \$ 20,000,000 Tenure 40 Interest rate 2.00% Quarterly Payments \$ 731,115

### 1.7 Depicting how much will Casino.com Corporation owe on this loan after making quarterly payments for three years:

 Particulars Value Interest rate 2.00% Quarterly Payments \$ 731,115 Time 28 Total payments conducted in 3 years \$ 15,559,057

### 1.8 Depicting the annual percentage rate on the original ten-year 8 % loan:

 Particulars Value Interest rate 8%

### 1.9 Depicting the effective annual rate (EAR) on the original ten-year 8 % loan:

 Particulars Value r 0.01 n 5.00 EAR 4.90

### 2.a Depicting the market rate of return for the bond:

 Particulars Value Current price 100.00 Time 10 years Current price 78.12 Return 2.50%

### 2.b Depicting the market rate of return for the bond if you hold for 1 year and submit it:

 Particulars Value Bond price 78.12 Time 1 Current price 80.85 Return 3.50%

### 2.c Depicting the return for the year:

 Particulars Value FV 1000 rate 3.50% n 1 Market price \$ 966 Bond price 1000 Coupon payment rate 2.50% Market price \$ 966 Coupon payment 25 Return for the year -0.9%

The returns of the bond mainly change due to its price, where increased current prices and declining selling prices directly reduces the overall returns of the company. The declining value of selling price from the buying price mainly reduces the overall return of the organisation (Block and Galabuzi 2018). Therefore, the declining value of the bond even with coupon payment reduces the overall rate of return for the investor.

### 3. Depicting the rate of return will be earned on that investment:

 Particulars Value Dividend growth rate 5% Market return 11% Next Annual dividend 3.7 Exp Share price of McDonalds \$ 61.7 Current price of McDonalds \$ 157.3

The valuations conducted in the above table mainly helps in identifying the overall theoretical price of McDonalds. which is relatively lower that the current share price of the company. The theoretically share price is mainly at the levels of \$61.7, while the current share price is at \$157.3, which indicates that investors should ignore the company, as decline in its share value is estimated (Canales 2016).

### 4. Classifying each event as a source of systematic and unsystematic risk:

 Question Type of Risk a. Systematic Risk b. Systematic Risk c. Unsystematic Risk d. Unsystematic Risk e. Systematic Risk

### 5.a Calculating payback period of the investment:

 Year Cash flow Cum cash flow Disc factor Dis cash flow 0 \$ (85,000.00) \$ (85,000.00) 1.00 \$ (85,000.00) 1 \$   18,000.00 \$ (67,000.00) 0.89 \$ 16,071.43 2 \$   22,500.00 \$ (44,500.00) 0.80 \$ 17,936.86 3 \$   27,000.00 \$ (17,500.00) 0.71 \$ 19,218.07 4 \$   31,500.00 \$ 14,000.00 0.64 \$ 20,018.82 5 \$   36,000.00 \$ 50,000.00 0.57 \$ 20,427.37 Payback period 3.56 years

### 5.b Calculating NPV of the proposed investment:

 Year Cash flow Cum cash flow Disc factor Dis cash flow 0 \$ (85,000.00) \$ (85,000.00) 1.00 \$ (85,000.00) 1 \$   18,000.00 \$ (67,000.00) 0.89 \$ 16,071.43 2 \$   22,500.00 \$ (44,500.00) 0.80 \$ 17,936.86 3 \$   27,000.00 \$ (17,500.00) 0.71 \$ 19,218.07 4 \$   31,500.00 \$ 14,000.00 0.64 \$ 20,018.82 5 \$   36,000.00 \$ 50,000.00 0.57 \$ 20,427.37 NPV \$ 8,676.10

### 5.c Calculating IRR of the proposed investment:

 Year Cash flow Cum cash flow Disc factor Dis cash flow 0 \$ (85,000.00) \$ (85,000.00) 1.00 \$ (85,000.00) 1 \$   18,000.00 \$ (67,000.00) 0.89 \$ 16,071.43 2 \$   22,500.00 \$ (44,500.00) 0.80 \$ 17,936.86 3 \$   27,000.00 \$ (17,500.00) 0.71 \$ 19,218.07 4 \$   31,500.00 \$ 14,000.00 0.64 \$ 20,018.82 5 \$   36,000.00 \$ 50,000.00 0.57 \$ 20,427.37 IRR 16%

### 5.d Recommending relevant implementation of the proposed project:

Both IRR and NPV of the project is relatively positive indicating viability of the project in generating higher return from investment. The overall NPV is mainly at the levels of \$ 8,676.10, while the overall IRR is at 16%. Both the investment appraisal techniques mainly depict financial viability of the project, which help in generating higher return from investment (Diebold 2017).

### 6.a Ranking investment based on NPVs:

 Year Renovate Replace 0 \$ (9,000,000.00) \$ (1,000,000.00) 1 \$    3,500,000.00 \$       600,000.00 2 \$    3,000,000.00 \$       500,000.00 3 \$    3,000,000.00 \$       400,000.00 4 \$    2,800,000.00 \$       300,000.00 5 \$    2,500,000.00 \$       200,000.00 NPV Rank 1 - \$ 1,128,309 Rank 2 - \$ 433,779

### 6.b Ranking investment based on IRR:

 Year Renovate Replace 0 \$ (9,000,000.00) \$ (1,000,000.00) 1 \$    3,500,000.00 \$       600,000.00 2 \$    3,000,000.00 \$       500,000.00 3 \$    3,000,000.00 \$       400,000.00 4 \$    2,800,000.00 \$       300,000.00 5 \$    2,500,000.00 \$       200,000.00 IRR Rank 2 – 20% Rank 1 – 36%

### 6.c Depicting why the result yield mixed result:

The mixed result provided by the investment is mainly due to the different levels of investment appraisal techniques used by the company. The NPV valuation mainly uses time valuation and cash flow to identify the most viable investment opportunity. On the other hand, the IRR method is mainly used by the organisation in detecting the level of returns that will be generated from the project. According to the NPV valuation renovate project is the viable options, whereas replace project is viable in case of IRR calculation. The difference in calculation are mainly used by investors and managers when evaluating the overall projects (Finance and Zwerman 2015). Managers mainly use IRR as it helps in detecting projects, whose overall return is high, while NPV is mainly used in detecting projects having higher net present value.

### 7 Calculating NPV for each project:

 Year Project A Project B Project C Project D Project E 0 \$ (20,000.0) \$ (600,000.0) \$ (150,000.0) \$ (760,000.0) \$ (100,000.0) 1 \$ 3,000.0 \$ 120,000.0 \$ 18,000.0 \$ 185,000.0 \$ - 2 \$ 3,000.0 \$ 145,000.0 \$ 17,000.0 \$ 185,000.0 \$ - 3 \$ 3,000.0 \$ 170,000.0 \$ 16,000.0 \$ 185,000.0 \$ - 4 \$ 3,000.0 \$ 190,000.0 \$ 15,000.0 \$ 185,000.0 \$ 25,000.0 5 \$ 3,000.0 \$ 220,000.0 \$ 15,000.0 \$ 185,000.0 \$ 36,000.0 6 \$ 3,000.0 \$ 240,000.0 \$ 14,000.0 \$ 185,000.0 \$ - 7 \$ 3,000.0 \$ 13,000.0 \$ 185,000.0 \$ 60,000.0 8 \$ 3,000.0 \$ 12,000.0 \$ 185,000.0 \$ 72,000.0 9 \$ 3,000.0 \$ 11,000.0 \$ 84,000.0 10 \$ 3,000.0 \$ 10,000.0 NPV \$ (4,943.7) \$ 47,537.0 \$ (74,477.9) \$ 70,154.5 \$ 2,163.4 Opinion Non-acceptable Acceptable Non-acceptable Acceptable Acceptable

### 8.a Calculating payback period for the investment:

 Cash Flows Alpha Beta Gamma Payback period 3.5 2.5 3.33

### 8.b Depicting whether the company will accept the project of payback period is 3 years and 4 years:

 Cash Flows Alpha Beta Gamma Selection based on If the cut-off period is 3 years Unaccepted Accepted Unaccepted Selection based on If the cut-off period is 4 years Accepted Accepted Accepted

### 8.c Selecting which investment is selected if shortest payback period is identified:

 Cash Flows Alpha Beta Gamma Selection based on Investment in shortest period Unaccepted Accepted Unaccepted

### 8.d Depicting which projects will be accepted:

 Particulars Alpha Beta Gamma Selection based on Payback Unaccepted Accepted Unaccepted

### 8.e Depicting the investment which will be selected if company uses payback period:

 Particulars Alpha Beta Gamma Selection based on payback Unaccepted Accepted Unaccepted

### 8.f Depicting the project will be accepted:

 Particulars Alpha Beta Gamma Selection based on discounting rate Unaccepted Accepted Unaccepted

### 9. Explaining the information the following ratios provides about a firm:

 Ratios Explanation Quick ratio With the help of quick ratio relevant liquidity of the organisation is detected by investors. In addition, the ratio also helps in identifying ability of the company to support its short term financial obligations. Cash ratio The cash ratio indicates overall cash position of the company, where investors can identify availability of the company in supporting its liabilities. The cash ratio indicates the cash availability condition and detect whether company can have short term liquidity issues. Capital intensity ratio The ratio relevantly compares the overall capital, which has been deployed by the organisation in generating the revenue Total asset turnover The ratio mainly depicts viability of the organisation in utilising the available assets in accumulating the relevant revenues and net profit. Equity multiplier With the use of equity multiplier investors are mainly able to detect the assets, which has been financed by shareholders. In addition, it also indicates the level of debt accumulation, which has been maintained by the company during the fiscal year. Long-term debt ratio The ratio indicates the overall debt, which has been maintained by the organisation in accumulating the assets. The level of debt, loan and financial obligations used by the organisation in crating the assets are identified from long-term debt ratio. Times interest earned ratio The ratio indicates ability of the company in supporting the overall loans and finance cost. This relevantly indicates that times interest earned allows banks to detect financial viability of the company in supporting its finance cost. Profit margin With the help of profit margin ratio investors are able to detect financial viability of the company and the relevant trends in which profits have been obtained. Return on assets The ratio mainly helps in identifying the level of profits, which has been obtained by the company by deploying its total assets. This detection of the ratios allows investor to gauge into the efficiency of the management in controlling it operations. Return on equity Moreover, the ratio also allows the investor in identifying the return on equity, which has been obtained by deploying overall assets. This helps in identifying the overall equity capital used by the management in producing the profits. Price earnings ratio The price earnings ratio mainly allows the investor to evaluate company’s current share price with its earnings per share. This helps investor in making adequate investment decisions and generate higher return from investment.

### 10.a Calculating required rate of return for each of the above stocks:

 Stock Rate of return Fire 10.8% Water 14.0% Air 16.8%

### 10.b Calculating the required rate of return for the above portfolio:

 Name of Company Invested money Weights Rate of return Fire \$2.00 20.0% 10.8% Water \$3.00 30.0% 14.0% Air \$5.00 50.0% 16.8% Total \$10.00 Rate of return of portfolio 14.8%

### 10.c Calculating beta of the portfolio and weighted average beta and the CAPM formula:

 Name of Company Invested money Beta of the portfolio 1.35 Portfolio returns 14.76%

### 10.d Calculating the required rate of return for the new portfolio using the above method:

 Name of Company Invested money Weights Rate of return Fire \$2.00 20.0% 10.8% Water \$3.00 30.0% 14.0% Air \$5.00 50.0% 16.8% Total \$10.00 Rate of return of portfolio 15.68%

### 10.e Describing the above change in investor’s portfolio reflects about the new risk attitude:

From the overall evaluation of above portfolio calculation, it could be detected that the portfolio investor is mainly a risk taker. This indicates that the investor aims in increasing its overall return form investment, regardless of the high risk, which is been accumulated within the portfolio.

## Reference and Bibliography:

Balios, D., Daskalakis, N., Eriotis, N. and Vasiliou, D., 2016. SMEs capital structure determinants during severe economic crisis: The case of Greece. Cogent Economics & Finance, 4(1), p.1145535.

Block, S. and Galabuzi, G.E., 2018. Colour Coded Labour Markets. Race and Racialization, 2E: Essential Readings, p.394.

Buckland, R. and Davis, E.W. eds., 2016. Finance for growing enterprises. Routledge.

Canales, R., 2016. From ideals to institutions: Institutional entrepreneurship and the growth of Mexican small business finance. Organization Science, 27(6), pp.1548-1573.

Diebold, F.X., 2017. Forecasting in Economics. Business, Finance and Beyond.

Finance, C. and Zwerman, S., 2015. The visual effects producer: understanding the art and business of VFX. CRC Press.

Fraser, S., Bhaumik, S.K. and Wright, M., 2015. What do we know about entrepreneurial finance and its relationship with growth?. International Small Business Journal, 33(1), pp.70-88.

Haeger, J.D., 2017. John Jacob Astor: Business and Finance in the Early Republic. Wayne State University Press.

Hoepner, A., Oikonomou, I., Scholtens, B. and Schröder, M., 2016. The effects of corporate and country sustainability characteristics on the cost of debt: an international investigation. Journal of Business Finance & Accounting, 43(1-2), pp.158-190.

Jordà, Ò., Schularick, M. and Taylor, A.M., 2016. The great mortgaging: housing finance, crises and business cycles. Economic Policy, 31(85), pp.107-152.

Li, X., 2015. Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), pp.555-582.

Macve, R.H., 2015. Fair value vs conservatism? Aspects of the history of accounting, auditing, business and finance from ancient Mesopotamia to modern China. The British Accounting Review, 47(2), pp.124-141.

McLean, R.D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly external finance. The Journal of Finance, 69(3), pp.1377-1409.

Qurashi, M. and Zahoor, M., 2017. Working Capital Determinants for the UK Pharmaceutical Companies Listed on FTSE 350 Index. International Journal of Academic Research in Accounting, Finance and Management Sciences, 7(1), pp.11-17.

Storey, D.J., 2016. Understanding the small business sector. Routledge.

Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and applications. Pearson.

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