Analyzing Interest vs. Principal in Business Finance: An Essay

Question:

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?

Answer:

Part A:

Office Building	$ 25	Million
Loan to value ratio	80%
Loan amount	$ 20
Year	10
Interest rate	8%
Payment	Monthly

1.1)

Que 1 a)
Calculation of monthly payment
Loan	$ 2,00,00,000
Tenure (months)	120
Interest rate monthly	0.67%
EMI	$2,42,655

This explains that the EMI of the company is $ 2,42,655.

1.2)

Question 1b)
Calculation of monthly interest
Loan amount	$2,00,00,000
EMI	$2,42,655
Interest amount (Balance loan amount * interest rate)	$1,33,333

(Tucker, 2011)

The interest payment of first month would be $ 1,33,333.

1.3)

Question 1c)
Calculation of monthly interest
Loan amount	$2,00,00,000
EMI	$2,42,655
Interest amount (Balance loan amount * interest rate)	$1,33,333
Principle amount (EMI - Interest amount)	$1,09,322

The principle payment of company would be $ 1,09,322.

1.4)

Que 1d)
Calculation of loan amount after 3 year
Loan	$2,00,00,000
Less: total Principle amount in 3 years	44,31,422
Balance Amount	1,55,68,577.62

Loan Schedule
EMI No.	Opening balance loan	EMI	Interest	Closing balance loan
1	2,00,00,000	2,42,655.19	1,33,333	1,98,90,678
2	1,98,90,678	2,42,655.19	1,32,604.52	1,97,80,627
3	1,97,80,627	2,42,655.19	1,31,870.85	1,96,69,843
4	1,96,69,843	2,42,655.19	1,31,132.29	1,95,58,320
5	1,95,58,320	2,42,655.19	1,30,388.80	1,94,46,054
6	1,94,46,054	2,42,655.19	1,29,640.36	1,93,33,039
7	1,93,33,039	2,42,655.19	1,28,886.93	1,92,19,271
8	1,92,19,271	2,42,655.19	1,28,128.47	1,91,04,744
9	1,91,04,744	2,42,655.19	1,27,364.96	1,89,89,454
10	1,89,89,454	2,42,655.19	1,26,596.36	1,88,73,395
11	1,88,73,395	2,42,655.19	1,25,822.63	1,87,56,562
12	1,87,56,562	2,42,655.19	1,25,043.75	1,86,38,951
13	1,86,38,951	2,42,655.19	1,24,259.67	1,85,20,555
14	1,85,20,555	2,42,655.19	1,23,470.37	1,84,01,371
15	1,84,01,371	2,42,655.19	1,22,675.80	1,82,81,391
16	1,82,81,391	2,42,655.19	1,21,875.94	1,81,60,612
17	1,81,60,612	2,42,655.19	1,21,070.75	1,80,39,028
18	1,80,39,028	2,42,655.19	1,20,260.18	1,79,16,633
19	1,79,16,633	2,42,655.19	1,19,444.22	1,77,93,422
20	1,77,93,422	2,42,655.19	1,18,622.81	1,76,69,389
21	1,76,69,389	2,42,655.19	1,17,795.93	1,75,44,530
22	1,75,44,530	2,42,655.19	1,16,963.53	1,74,18,838
23	1,74,18,838	2,42,655.19	1,16,125.59	1,72,92,309
24	1,72,92,309	2,42,655.19	1,15,282.06	1,71,64,936
25	1,71,64,936	2,42,655.19	1,14,432.90	1,70,36,713
26	1,70,36,713	2,42,655.19	1,13,578.09	1,69,07,636
27	1,69,07,636	2,42,655.19	1,12,717.57	1,67,77,699
28	1,67,77,699	2,42,655.19	1,11,851.32	1,66,46,895
29	1,66,46,895	2,42,655.19	1,10,979.30	1,65,15,219
30	1,65,15,219	2,42,655.19	1,10,101.46	1,63,82,665
31	1,63,82,665	2,42,655.19	1,09,217.77	1,62,49,228
32	1,62,49,228	2,42,655.19	1,08,328.18	1,61,14,901
33	1,61,14,901	2,42,655.19	1,07,432.67	1,59,79,678
34	1,59,79,678	2,42,655.19	1,06,531.19	1,58,43,554
35	1,58,43,554	2,42,655.19	1,05,623.69	1,57,06,523
36	1,57,06,523	2,42,655.19	1,04,710.15	1,55,68,578
Total principle amount			44,31,422.38

1.5)

In case of 8%
Total EMI amount	2,03,83,035.85
Total interest amount	48,14,458
	48,14,458

In case of 7%
Total EMI amount	1,97,37,611
Total interest amount	41,69,033
Refinanced cost	2,50,000
	44,19,033

Que 1 e)
Calculation of monthly payment
Loan	$ 1,55,68,578
Tenure (months)	84
Interest rate monthly	0.58%
EMI	$2,34,972

Loan Schedule
EMI No.	Opening balance loan	EMI	Interest	Closing balance loan
37	1,55,68,578	2,42,655.19	1,03,791	1,54,29,713
38	1,54,29,713	2,42,655.19	1,02,865	1,52,89,923
39	1,52,89,923	2,42,655.19	1,01,933	1,51,49,200
40	1,51,49,200	2,42,655.19	1,00,995	1,50,07,540
41	1,50,07,540	2,42,655.19	1,00,050	1,48,64,935
42	1,48,64,935	2,42,655.19	99,100	1,47,21,379
43	1,47,21,379	2,42,655.19	98,143	1,45,76,866
44	1,45,76,866	2,42,655.19	97,179	1,44,31,390
45	1,44,31,390	2,42,655.19	96,209	1,42,84,944
46	1,42,84,944	2,42,655.19	95,233	1,41,37,522
47	1,41,37,522	2,42,655.19	94,250	1,39,89,117
48	1,39,89,117	2,42,655.19	93,261	1,38,39,723
49	1,38,39,723	2,42,655.19	92,265	1,36,89,332
50	1,36,89,332	2,42,655.19	91,262	1,35,37,939
51	1,35,37,939	2,42,655.19	90,253	1,33,85,537
52	1,33,85,537	2,42,655.19	89,237	1,32,32,119
53	1,32,32,119	2,42,655.19	88,214	1,30,77,678
54	1,30,77,678	2,42,655.19	87,185	1,29,22,207
55	1,29,22,207	2,42,655.19	86,148	1,27,65,700
56	1,27,65,700	2,42,655.19	85,105	1,26,08,149
57	1,26,08,149	2,42,655.19	84,054	1,24,49,549
58	1,24,49,549	2,42,655.19	82,997	1,22,89,890
59	1,22,89,890	2,42,655.19	81,933	1,21,29,168
60	1,21,29,168	2,42,655.19	80,861	1,19,67,374
61	1,19,67,374	2,42,655.19	79,782	1,18,04,501
62	1,18,04,501	2,42,655.19	78,697	1,16,40,543
63	1,16,40,543	2,42,655.19	77,604	1,14,75,491
64	1,14,75,491	2,42,655.19	76,503	1,13,09,339
65	1,13,09,339	2,42,655.19	75,396	1,11,42,079
66	1,11,42,079	2,42,655.19	74,281	1,09,73,705
67	1,09,73,705	2,42,655.19	73,158	1,08,04,208
68	1,08,04,208	2,42,655.19	72,028	1,06,33,580
69	1,06,33,580	2,42,655.19	70,891	1,04,61,816
70	1,04,61,816	2,42,655.19	69,745	1,02,88,906
71	1,02,88,906	2,42,655.19	68,593	1,01,14,844
72	1,01,14,844	2,42,655.19	67,432	99,39,621
73	99,39,621	2,42,655.19	66,264	97,63,230
74	97,63,230	2,42,655.19	65,088	95,85,663
75	95,85,663	2,42,655.19	63,904	94,06,912
76	94,06,912	2,42,655.19	62,713	92,26,969
77	92,26,969	2,42,655.19	61,513	90,45,827
78	90,45,827	2,42,655.19	60,306	88,63,478
79	88,63,478	2,42,655.19	59,090	86,79,912
80	86,79,912	2,42,655.19	57,866	84,95,123
81	84,95,123	2,42,655.19	56,634	83,09,102
82	83,09,102	2,42,655.19	55,394	81,21,841
83	81,21,841	2,42,655.19	54,146	79,33,332
84	79,33,332	2,42,655.19	52,889	77,43,565
85	77,43,565	2,42,655.19	51,624	75,52,534
86	75,52,534	2,42,655.19	50,350	73,60,229
87	73,60,229	2,42,655.19	49,068	71,66,642
88	71,66,642	2,42,655.19	47,778	69,71,764
89	69,71,764	2,42,655.19	46,478	67,75,587
90	67,75,587	2,42,655.19	45,171	65,78,103
91	65,78,103	2,42,655.19	43,854	63,79,302
92	63,79,302	2,42,655.19	42,529	61,79,175
93	61,79,175	2,42,655.19	41,195	59,77,714
94	59,77,714	2,42,655.19	39,851	57,74,911
95	57,74,911	2,42,655.19	38,499	55,70,755
96	55,70,755	2,42,655.19	37,138	53,65,238
97	53,65,238	2,42,655.19	35,768	51,58,351
98	51,58,351	2,42,655.19	34,389	49,50,085
99	49,50,085	2,42,655.19	33,001	47,40,430
100	47,40,430	2,42,655.19	31,603	45,29,378
101	45,29,378	2,42,655.19	30,196	43,16,919
102	43,16,919	2,42,655.19	28,779	41,03,043
103	41,03,043	2,42,655.19	27,354	38,87,741
104	38,87,741	2,42,655.19	25,918	36,71,005
105	36,71,005	2,42,655.19	24,473	34,52,823
106	34,52,823	2,42,655.19	23,019	32,33,186
107	32,33,186	2,42,655.19	21,555	30,12,086
108	30,12,086	2,42,655.19	20,081	27,89,511
109	27,89,511	2,42,655.19	18,597	25,65,453
110	25,65,453	2,42,655.19	17,103	23,39,900
111	23,39,900	2,42,655.19	15,599	21,12,845
112	21,12,845	2,42,655.19	14,086	18,84,275
113	18,84,275	2,42,655.19	12,562	16,54,182
114	16,54,182	2,42,655.19	11,028	14,22,554
115	14,22,554	2,42,655.19	9,484	11,89,383
116	11,89,383	2,42,655.19	7,929	9,54,657
117	9,54,657	2,42,655.19	6,364	7,18,366
118	7,18,366	2,42,655.19	4,789	4,80,500
119	4,80,500	2,42,655.19	3,203	2,41,048
120	2,41,048	2,42,655.19	1,607	(0)

(Sherman, 2005)

Loan Schedule
EMI No.	Opening balance loan	EMI	Interest	Closing balance loan
37	1,55,68,578	2,34,972	90,817	1,54,24,423
38	1,54,24,423	2,34,972	89,976	1,52,79,427
39	1,52,79,427	2,34,972	89,130	1,51,33,585
40	1,51,33,585	2,34,972	88,279	1,49,86,893
41	1,49,86,893	2,34,972	87,424	1,48,39,345
42	1,48,39,345	2,34,972	86,563	1,46,90,936
43	1,46,90,936	2,34,972	85,697	1,45,41,662
44	1,45,41,662	2,34,972	84,826	1,43,91,517
45	1,43,91,517	2,34,972	83,951	1,42,40,496
46	1,42,40,496	2,34,972	83,070	1,40,88,594
47	1,40,88,594	2,34,972	82,183	1,39,35,806
48	1,39,35,806	2,34,972	81,292	1,37,82,126
49	1,37,82,126	2,34,972	80,396	1,36,27,550
50	1,36,27,550	2,34,972	79,494	1,34,72,073
51	1,34,72,073	2,34,972	78,587	1,33,15,688
52	1,33,15,688	2,34,972	77,675	1,31,58,392
53	1,31,58,392	2,34,972	76,757	1,30,00,177
54	1,30,00,177	2,34,972	75,834	1,28,41,040
55	1,28,41,040	2,34,972	74,906	1,26,80,975
56	1,26,80,975	2,34,972	73,972	1,25,19,976
57	1,25,19,976	2,34,972	73,033	1,23,58,037
58	1,23,58,037	2,34,972	72,089	1,21,95,154
59	1,21,95,154	2,34,972	71,138	1,20,31,321
60	1,20,31,321	2,34,972	70,183	1,18,66,532
61	1,18,66,532	2,34,972	69,221	1,17,00,782
62	1,17,00,782	2,34,972	68,255	1,15,34,065
63	1,15,34,065	2,34,972	67,282	1,13,66,376
64	1,13,66,376	2,34,972	66,304	1,11,97,708
65	1,11,97,708	2,34,972	65,320	1,10,28,056
66	1,10,28,056	2,34,972	64,330	1,08,57,415
67	1,08,57,415	2,34,972	63,335	1,06,85,778
68	1,06,85,778	2,34,972	62,334	1,05,13,141
69	1,05,13,141	2,34,972	61,327	1,03,39,496
70	1,03,39,496	2,34,972	60,314	1,01,64,838
71	1,01,64,838	2,34,972	59,295	99,89,161
72	99,89,161	2,34,972	58,270	98,12,460
73	98,12,460	2,34,972	57,239	96,34,727
74	96,34,727	2,34,972	56,203	94,55,958
75	94,55,958	2,34,972	55,160	92,76,147
76	92,76,147	2,34,972	54,111	90,95,286
77	90,95,286	2,34,972	53,056	89,13,370
78	89,13,370	2,34,972	51,995	87,30,393
79	87,30,393	2,34,972	50,927	85,46,349
80	85,46,349	2,34,972	49,854	83,61,231
81	83,61,231	2,34,972	48,774	81,75,034
82	81,75,034	2,34,972	47,688	79,87,750
83	79,87,750	2,34,972	46,595	77,99,373
84	77,99,373	2,34,972	45,496	76,09,898
85	76,09,898	2,34,972	44,391	74,19,318
86	74,19,318	2,34,972	43,279	72,27,625
87	72,27,625	2,34,972	42,161	70,34,815
88	70,34,815	2,34,972	41,036	68,40,880
89	68,40,880	2,34,972	39,905	66,45,813
90	66,45,813	2,34,972	38,767	64,49,609
91	64,49,609	2,34,972	37,623	62,52,260
92	62,52,260	2,34,972	36,472	60,53,760
93	60,53,760	2,34,972	35,314	58,54,102
94	58,54,102	2,34,972	34,149	56,53,280
95	56,53,280	2,34,972	32,977	54,51,286
96	54,51,286	2,34,972	31,799	52,48,113
97	52,48,113	2,34,972	30,614	50,43,756
98	50,43,756	2,34,972	29,422	48,38,206
99	48,38,206	2,34,972	28,223	46,31,457
100	46,31,457	2,34,972	27,017	44,23,502
101	44,23,502	2,34,972	25,804	42,14,335
102	42,14,335	2,34,972	24,584	40,03,947
103	40,03,947	2,34,972	23,356	37,92,332
104	37,92,332	2,34,972	22,122	35,79,482
105	35,79,482	2,34,972	20,880	33,65,391
106	33,65,391	2,34,972	19,631	31,50,051
107	31,50,051	2,34,972	18,375	29,33,454
108	29,33,454	2,34,972	17,112	27,15,595
109	27,15,595	2,34,972	15,841	24,96,464
110	24,96,464	2,34,972	14,563	22,76,055
111	22,76,055	2,34,972	13,277	20,54,361
112	20,54,361	2,34,972	11,984	18,31,373
113	18,31,373	2,34,972	10,683	16,07,084
114	16,07,084	2,34,972	9,375	13,81,487
115	13,81,487	2,34,972	8,059	11,54,574
116	11,54,574	2,34,972	6,735	9,26,338
117	9,26,338	2,34,972	5,404	6,96,770
118	6,96,770	2,34,972	4,064	4,65,863
119	4,65,863	2,34,972	2,718	2,33,609
120	2,33,609	2,34,972	1,363	0

1.6)

Que 1 f)
Calculation of quarterly payment
Loan	$ 2,00,00,000
Tenure (months)	40
Interest rate monthly	1.75%
EMI	$6,99,442

1.7)

Que 1 g)
Calculation of quarterly payment
Loan	$ 2,00,00,000
Tenure (months)	40
Interest rate monthly	1.75%
EMI	$6,99,442
Amount after 3 years	1,53,78,596

Loan Schedule
EMI No.	Opening balance loan	EMI	Interest	Closing balance loan
1	2,00,00,000	6,99,442	3,50,000	1,96,50,558
2	1,96,50,558	6,99,442	3,43,885	1,92,95,001
3	1,92,95,001	6,99,442	3,37,663	1,89,33,222
4	1,89,33,222	6,99,442	3,31,331	1,85,65,111
5	1,85,65,111	6,99,442	3,24,889	1,81,90,559
6	1,81,90,559	6,99,442	3,18,335	1,78,09,452
7	1,78,09,452	6,99,442	3,11,665	1,74,21,676
8	1,74,21,676	6,99,442	3,04,879	1,70,27,113
9	1,70,27,113	6,99,442	2,97,974	1,66,25,646
10	1,66,25,646	6,99,442	2,90,949	1,62,17,153
11	1,62,17,153	6,99,442	2,83,800	1,58,01,511
12	1,58,01,511	6,99,442	2,76,526	1,53,78,596

(Phillips & Stawarski, 2016)

1.8)

Que 1 h)
Calculation of annual % rate
Interest rate	8.00%

1.9)

Que 1 i)
Calculation of Effective annual rate
Interest rate	8.00%
Compounding monthly	12
EAR	0.67%

Part B:

2.1)

Que 1a)
Calculation of required return
Calculation of required return
Face value	$ 100
Time	10
Current selling price	$ 78.12
Required rate of return	3.28%

2.2)

Que 1b)
Calculation of bond return
Market price	$ 100
Face value	$ 78.12
Rate	3.28%
Return	$ 3.28

2.3)

Que 1c)

Rate	2.50%
Time	10
Market's required rate of return	3.28%
Coupon rate	3.28%
Par value	$ 1,000

Calculation of bond return
Market price	$ 1,000
Coupon rate	3.28%
Interest rate	2.50%
Return	$ 287.07

It explains that the return of second bond option is way better than the first option.

Part C:

Quarterly dividend	$ 3.28
Past quarterly dividend	$ 3.12
Growth rate	5%
Market return	11%
Next annual dividend	$ 3.70
Calculation of cost of Share price
Dividend expected	$ 3.70
Growth rate	5%
Rate of return	11.00%
Share price	$ 61.67
Formula = Growth rate = (dividend/ share price)- cost of equity
Calculation of required rate of return
Dividend expected	$ 3.75
Growth rate	5%
Share price	$ 61.67
Rate of return	11.08%

(Niu, 2006)

Part D:

A)	Systematic risk
B)	Systematic risk
C)	Unsystematic risk
D)	Unsystematic risk
E)	Unsystematic risk

Part E)

Year	Cash Flows
1	$ 18,000
2	$ 22,500
3	$ 27,000
4	$ 31,500
5	$ 36,000

5.1)

Payback period
Time	Cash Flow	Cumulative Cash Flow
0	$ -85,000	$ -85,000
1	$ 18,000	-62500
2	$ 22,500	-35500
3	$ 27,000	-4000
4	$ 31,500	32000
5	$ 36,000	32000
Payback Period		3.13

5.2)

Net Present Value
Time	Cash Flow	Discount rate	Cash flow
0	$ -85,000	1	-85000
1	$ 18,000	0.893	16071
2	$ 22,500	0.797	17937
3	$ 27,000	0.712	19218
4	$ 31,500	0.636	20019
5	$ 36,000	0.567	20427
Net Present Value			8673

5.3)

Calculation of IRR
Year	Cash Flows
0	$ -85,000
1	$ 18,000
2	$ 22,500
3	$ 27,000
4	$ 31,500
5	$ 36,000
IRR	16%

(Nobes & Parker, 2008)

5.4)

The above capital budgeting evaluation over the investment proposal of the company explains that this investment opportunity must be accepted by the company as the entire investment amount would be got back by the company in 3.28 years and the project would offer positive return to the company. On the other hand, the internal rate of return of the company is 16% which is way higher than the cost of capital.

Part F)

6.1)

Net Present Value				Net Present Value
Time	Cash Flow	Discount rate	Cash flow	Time	Cash Flow	Discount rate	Cash flow
0	$ -90,00,000	1	-9000000	0	$ -10,00,000	1	-1000000
1	$ 35,00,000	0.87	3043478	1	$ 6,00,000	0.87	521739
2	$ 30,00,000	0.76	2268431	2	$ 5,00,000	0.76	378072
3	$ 30,00,000	0.66	1972549	3	$ 4,00,000	0.66	263006
4	$ 28,00,000	0.57	1600909	4	$ 3,00,000	0.57	171526
5	$ 25,00,000	0.50	1242942	5	$ 2,00,000	0.50	99435
Net Present Value			$ 11,28,309	Net Present Value			$ 4,33,779

(Moles, Parrino and Kidwekk, 2011)

According to this calculation, project A is way better than project B.

6.2)

Calculation of IRR		Calculation of IRR
Year	Cash Flows	Year	Cash Flows
0	$ -90,00,000	0	$ -10,00,000
1	$ 35,00,000	1	$ 6,00,000
2	$ 30,00,000	2	$ 5,00,000
3	$ 30,00,000	3	$ 4,00,000
4	$ 28,00,000	4	$ 3,00,000
5	$ 25,00,000	5	$ 2,00,000
IRR	20%	IRR	36%

According to this calculation, project B is way better than project A.

6.3)

According to the above evaluation, in case of NPV, project A is better and in case of IRR, project B is better. These differences have occurred due to different methods and techniques. In case of profit, the project A is better but in case of cost, company should go for project B. The decision depends on the company (Marginson, 2009).

Part G)

Year	Project A	P.V. factor	Present value
0	$ -20,000	1	-20000
1	$ 3,000	0.86957	2609
2	$ 3,000	0.75614	2268
3	$ 3,000	0.65752	1973
4	$ 3,000	0.57175	1715
5	$ 3,000	0.49718	1492
6	$ 3,000	0.43233	1297
7	$ 3,000	0.37594	1128
8	$ 3,000	0.3269	981
9	$ 3,000	0.28426	853
10	$ 3,000	0.24718	742
NPV			-4943.69

Year	Project A	P.V. factor	Present value
0	$ -6,00,000	1	-600000
1	$ 1,20,000	0.86957	104348
2	$ 1,45,000	0.75614	109641
3	$ 1,70,000	0.65752	111778
4	$ 1,90,000	0.57175	108633
5	$ 2,20,000	0.49718	109379
6	$ 2,40,000	0.43233	103759
NPV			47537.04

Year	Project C	P.V. factor	Present value
0	$-1,50,000.00	1	-150000
1	$ 18,000.00	0.86957	15652
2	$ 17,000.00	0.75614	12854
3	$ 16,000.00	0.65752	10520
4	$ 15,000.00	0.57175	8576
5	$ 15,000.00	0.49718	7458
6	$ 14,000.00	0.43233	6053
7	$ 13,000.00	0.37594	4887
8	$ 12,000.00	0.3269	3923
9	$ 11,000.00	0.28426	3127
10	$ 10,000.00	0.24718	2472
NPV			-74478

(Hillier, Grinblatt and Titman, 2011)

Year	Project A	P.V. factor	Present value
0	$ -1,00,000	1	-100000
1	$ -	0.86957	0
2	$ -	0.75614	0
3	$ -	0.65752	0
4	$ 25,000	0.57175	14294
5	$ 36,000	0.49718	17898
6	$ -	0.43233	0
7	$ 60,000	0.37594	22556
8	$ 72,000	0.3269	23537
9	$ 84,000	0.28426	23878
10
NPV			2163.39

The above evaluation explains that the project A must not be accepted by the company as it would offer negative return to the company. On the other hand, project B, Project C, Project D and Project E must be accepted by the company due to their higher and positive return.

Part H)

Cash Flows	Alpha	Beta	Gamma
Cash Flows	($ in millions)	($ in millions)	($ in millions)
Initial Outflow	– 1.5	– 0.4	– 7.5
Year 1	0.3	0.1	2
Year 2	0.5	0.2	3
Year 3	0.5	0.2	2
Year 4	0.4	0.1	1.5
Year 5	0.3	– 0.2	5.5

8.1)

	Payback period				Payback period

Time		Cash Flow	Cumulative Cash Flow	Time		Cash Flow	Cumulative Cash Flow	Time	Cash Flow	Cumulative Cash Flow
		($ in millions)	($ in millions)			($ in millions)	($ in millions)		($ in millions)	($ in millions)
0		$ -1.50	$ -1.50	0		$ -0.40	$ -0.40	0	$ -7.50	$ -7.50
1		$ 0.30	$ -1.00	1		$ 0.10	$ -0.20	1	$ 2.00	$ -4.50
2		$ 0.50	$ -0.50	2		$ 0.20	$ -	2	$ 3.00	$ -2.50
3		$ 0.50	$ -0.10	3		$ 0.20	$ 0.10	3	$ 2.00	$ -1.00
4		$ 0.40	$ 0.20	4		$ 0.10	$ 0.20	4	$ 1.50	$ 4.50
5		$ 0.30	$ 0.20	5		– 0.2	$ 0.20	5	$ 5.50	$ 4.50

Payback Period			3.25	Payback Period			2.00	Payback Period		3.67

(Glajnaric, 2016)

8.2)

According to the above evaluation project Alpha is way better than any other project.

8.3)

If the shortest payback period is chose by the company than the company should go for project Beta.

8.4)

Payback period				Payback period				Payback period

Time	Cash Flow	Discounted payback	Cumulative Cash Flow	Time	Cash Flow	Discounted payback	Cumulative Cash Flow	Time	Cash Flow	Discounted payback	Cumulative Cash Flow
	($ in millions)		($ in millions)		($ in millions)	($ in millions)			($ in millions)	($ in millions)
0	-1.5	-1.30	-1.30	0	-0.4	-0.35	-0.35	0	$ -7.50	-6.52	-6.52
1	0.3	0.26	-1.04	1	0.1	0.09	-0.26	1	$ 2.00	1.74	-4.78
2	0.5	0.43	-0.61	2	0.2	0.17	-0.09	2	$ 3.00	2.61	-2.17
3	0.5	0.43	-0.17	3	0.2	0.17	0.09	3	$ 2.00	1.74	-0.43
4	0.4	0.35	0.17	4	0.1	0.09	0.17	4	$ 1.50	1.30	0.87
5	0.3	0.26	0.43	5	-0.2	-0.17	0.00	5	$ 5.50	4.78	5.65

Payback Period			3.50	Payback Period			2.50	Payback Period			0.70

Project Alpha must be accepted by the company (Daodaran, 2011).

8.5)

According to the above evaluation, project alpha should be accepted.

8.6)

If the opportunity cost of the company is very higher than the Gamma project should be accepted by the company.

Part I)

Financial Data
Description		JB Hi-FI Limited ($M)
		2017	2016	2015	2014	2013
Revenue		5628	3954	3652	3484	3308
Cost of goods sold		4398	3089	2854	2745	2610
Gross profit		1230	865	798	739	698
Operating profit		268	221	201	191	178
Net profit		172	152	137	128	116
Interest		11	4	6	9	10
Inventory		860	546	479	459	426
Current assets		1171	703	617	578	564
Cash and cash equivalents		73	52	49	43	67
Receivables		197	98	81	71	64
Current liabilities		886	447	380	352	442
Payables		584	302	254	244	335
Shares outstanding		439	49	57	58	63
Equity		854	405	343	295	243
Total liabilities		1599	588	552	565	600
Total assets		2453	993	895	860	843
Market share price		23.86
Long-term debt		559	110	139	180	124

Description	Formula	JB Hi-FI Limited
		2017	2016	2015	2014	2013
Profitability
Return on equity	Net profit/revenues	3.06%	3.84%	3.75%	3.67%	3.51%
Return on assets	Net profit/Equity	20.14%	37.53%	39.94%	43.39%	47.74%
Profit margin	Net profit / Sales	3.06%	3.84%	3.75%	3.67%	3.51%
Asset turnover	total assets / total sales *365 (Davies and Crawford, 2011)	159.088	91.6654	89.451	90.0976	93.0154
Price earnings ratio	Market value per share / Earnings per share	15.4935

Liquidity

Cash ratio	cash equivalents + cash / current liabilities	0.08239	0.11633	0.12895	0.12216	0.15158
Capital intensity ratio	Total assets /sales	0.44	0.25	0.25	0.25	0.25
Quick Ratio	Current assets-Inventory/current liabilities	0.35	0.35	0.36	0.34	0.31
Solvency

Times interest earned	EBIT / Interest expenses	24.3636	55.25	33.5	21.2222	17.8
Long term debt ratio	Long term debt/ total assets	0.23	0.11	0.16	0.21	0.15
Equity multiplier	Total assets / stockholder's equity	2.87	2.45	2.61	2.92	3.47

Part J)

10.1)

Calculation of cost of equity (CAPM)
	Fire	Water	Air
RF	4.00%	4.00%	4.00%
RM	12.00%	12.00%	12.00%
Beta	0.85	1.25	1.6
Required rate of return	10.80%	14.00%	16.80%

(Borio, 2014)

10.2)

Name of Company	$m invested	Required rate of return	Probability	Portfolio rate
Fire	$2	10.80%	0.2	0.0216
Water	$3	14.00%	0.3	0.042
Air	$5	16.80%	0.5	0.084
TOTAL	$10			14.76%

10.3)

	Beta
RF	4.00%
RM	12.00%
Required rate of return	14.76%
Beta	1.345

Calculation of required rate of return
RF	4.00%
RM	12.00%
Beta	1.345
Required rate of return	14.76%

(Bromwich and Bhimani, 2005)

10.4)

Name of Company	$m invested	Required rate of return	Probability	Portfolio rate

Water	$ 4.00	14.00%	0.3	0.042
Air	$ 6.00	16.80%	0.5	0.084
TOTAL	$ 10.00			12.60%

	RM
RF	4.00%
RM	12.00%
Required rate of return	12.60%
Beta	1.075
Calculation of required rate of return
RF	4.00%
RM	12.00%
Beta	1.075
Required rate of return	12.60%

10.5)

According to the above table, after the changes into the portfolio, the risk of the company have been lower (Brealey, Myers and Marcus, 2007).

References:

Borio, C., (2014). The financial cycle & macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Brealey, R., Myers, S.C. & Marcus, A.J., (2007). FundamentalsofCorporate Finance. Mc Graw Hill, New York.

Bromwich, M. & Bhimani, A., (2005). Management accounting: Pathways to progress. Cima publishing.

Damodaran, A, (2011), Applied corporate finance,3rd edition, John Wiley & sons, USA

Davies, T. & Crawford, I., (2011). Business accounting & finance. Pearson.

Glajnaric, M., (2016). The importance of dividend paying stocks. Equity, 30(2), p.6.

Hillier, D., Grinblatt, M. & Titman, S., (2011). Financial markets & corporate strategy. McGraw Hill.

Marginson, D.E., (2009). Beyond the budgetary control system: towards a two-tiered process of management control. Management Accounting Research, 10(3), pp.203-230.

Moles, P. Parrino, R & Kidwekk, D,. (2011), Corporate finance, European edition, John Wiley &sons, United Kingdom

Niu, F.F., (2006). Corporate governance & the quality of accounting earnings: a Canadian perspective. International Journal of Managerial Finance, 2(4), pp.302-327.

Nobes, C. & Parker, R.H., (2008). Comparative international accounting. Pearson Education.

Phillips, P.P. & Stawarski, C.A. (2016). Data Collection: Planning for & Collecting All Types of Data. John Wiley & Sons.

Sherman, S., (2005). Finance & fictionality in the early eighteenth century: Accounting for Defoe. Cambridge University Press.

Tucker, J.W., (2011). Selection bias & econometric remedies in accounting & finance research.

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