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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?

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 (\$ 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.

Cite This Work

[Accessed 17 September 2024].

My Assignment Help. 'FIN200: Business Finance' (My Assignment Help, 2020) <https://myassignmenthelp.com/free-samples/fin200-business-finance> accessed 17 September 2024.

My Assignment Help. FIN200: Business Finance [Internet]. My Assignment Help. 2020 [cited 17 September 2024]. Available from: https://myassignmenthelp.com/free-samples/fin200-business-finance.

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