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 |
$ 25,00,00,000 |
Million |
Loan to value ratio |
80% |
|
Loan amount |
$ 20,00,00,000 |
|
Year |
10 years |
|
Interest rate |
8% |
|
Payment |
Monthly Payment |
|
1.1)
Calculation of monthly payment |
|
Loan |
$ 2,00,00,000 |
Tenure (months) |
120 |
Interest rate monthly |
0.67% |
EMI |
$2,42,655 |
1.2)
Calculation of monthly interest |
|
NA1005 |
|
Loan amount |
$2,00,00,000 |
EMI |
$2,42,655 |
Interest amount (Balance loan amount * interest rate) |
$1,33,333 |
(Tucker, 2011)
1.3)
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 |
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 1.5
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) |
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)
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 |
1.8)
Calculation of annual % rate |
|
Interest rate |
8.00% |
1.9)
Calculation of Effective annual rate |
|
Interest rate |
8.00% |
Compounding monthly |
12 |
EAR |
8.30% |
Part B:
2.1)
Calculation of required return |
|
Face value |
$ 100 |
Time |
10 |
Current selling price |
$ 78.12 |
Required rate of return |
3.28% |
2.2)
Calculation of bond return |
|
Market price |
$ 100 |
time |
$ 9.00 |
Rate |
3.50% |
Loss |
$ 4.75 |
2.3)
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% |
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) |
Unsystematic risk |
C) |
Systematic risk |
D) |
Unsystematic risk |
E) |
Systematic risk |
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)
According to the above evaluation through the capital investment appraisal techniques on the given project, it has been evaluated that the payback period of the company is 3.13 year and the net present value of the company is position i.e. $ 8673. And the internal rate of return calculation explains about the total return of 16% which explains that the proposal is quite better and company could accept it after evaluating the WACC of the company.
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 |
NPV of first project is $ 11,28,309 and the Second project’s NPV is $ 4,33,779 which explains that project A is better.
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% |
Internal rate of return of project B is higher that means project B is better than project A.
6.3)
The above calculations brief that the NPV of first project is $ 11,28,309 and the Second project’s NPV is $ 4,33,779 which explains that project A is better. On the other hand, internal rate of return of project B is higher that means project B is better than project A. these conflicts have arisen due to various different methods. It depends on the company to choose the best project.
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 |
(Brigham & Houston, 2012)
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 |
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 table explains about the profitability position of entire 4 projects. It explains that the Project B, C and D would offer positive returns to the company whereas project A would offer negative returns, so company should accept the project B, C and D only.
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 |
(Ward, 2012)
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 |
8.2)
The table and calculation express that Alpha is better project than other projects. If the cut off payback period is concerned, than project Alpha is required.
8.3)
In case of shortest payback period, project Beta should be accepted by the company.
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 |
8.5)
Alpha project must be accepted by the company.
8.6)
In case of higher opportunity cost, Gamma project must be accepted by the company.
Part I)
Financial Data |
||||||
Description |
|
Unilever plc |
||||
|
|
2017 |
2016 |
2015 |
2014 |
2013 |
Revenue |
|
52713000000 |
53272000000 |
48436000000 |
49797000000 |
51324000000 |
Cost of goods sold |
|
26356500000 |
26636000000 |
24218000000 |
24898500000 |
25662000000 |
Gross profit |
|
26356500000 |
26636000000 |
24218000000 |
24898500000 |
25662000000 |
Operating profit |
|
52713000000 |
53272000000 |
48436000000 |
49797000000 |
51324000000 |
Net profit |
|
5184000000 |
4909000000 |
5171000000 |
4842000000 |
4480000000 |
Interest |
|
568000000 |
568000000 |
568000000 |
568000000 |
568000000 |
Inventory |
|
4278000000 |
0 |
0 |
3937000000 |
4436000000 |
Cash and cash equivalents |
|
3382000000 |
3382000000 |
3382000000 |
3382000000 |
3382000000 |
Current assets |
|
13884000000 |
12686000000 |
12347000000 |
12122000000 |
12147000000 |
Receivables |
|
3329000000 |
4804000000 |
5029000000 |
4831000000 |
4436000000 |
Current liabilities |
|
20556000000 |
20019000000 |
19642000000 |
17382000000 |
15815000000 |
Payables |
|
568000000 |
0 |
383000000 |
500000000 |
526000000 |
Shares |
|
2840200000 |
2840200000 |
2840200000 |
2840200000 |
2840200000 |
Equity |
|
16354000000 |
15439000000 |
13651000000 |
14344000000 |
15159000000 |
Total liabilities |
|
40075000000 |
36859000000 |
34376000000 |
31169000000 |
31007000000 |
Total assets |
|
56429000000 |
52298000000 |
48027000000 |
45513000000 |
46166000000 |
Market share price |
|
57.89 |
0 |
0 |
0 |
0 |
Long-term debt |
|
10933000000 |
10933000000 |
10933000000 |
10933000000 |
10933000000 |
Description |
Formula |
Unilever plc |
||||
|
|
2017 |
2016 |
2015 |
2014 |
2013 |
Profitability |
|
|
|
|
|
|
Return on equity |
Net profit/revenues |
9.83% |
9.21% |
10.68% |
9.72% |
8.73% |
Return on assets |
Net profit/Equity |
31.70% |
31.80% |
37.88% |
33.76% |
29.55% |
Profit margin |
Net profit / Sales |
9.83% |
9.21% |
10.68% |
9.72% |
8.73% |
Asset turnover |
total assets / total sales *365 |
390.73 |
358.33 |
361.92 |
333.60 |
328.32 |
Price earnings ratio |
Market value per share / Earnings per share |
37.59 |
|
|
|
|
Liquidity |
|
|
|
|
|
|
Cash ratio |
cash equivalents + cash / current liabilities |
0.675 |
0.634 |
0.629 |
0.697 |
0.768 |
Capital intensity ratio |
Total assets /sales |
1.07 |
0.98 |
0.99 |
0.91 |
0.90 |
Quick Ratio |
Current assets-Inventory/current liabilities |
(0.04) |
0.17 |
0.17 |
(0.03) |
(0.07) |
Solvency |
|
|
|
|
|
|
Times interest earned |
EBIT / Interest expenses |
92.80 |
93.79 |
85.27 |
87.67 |
90.36 |
Long term debt ratio |
Long term debt/ total assets |
0.19 |
0.21 |
0.23 |
0.24 |
0.24 |
Equity multiplier |
Total assets / stockholder's equity |
3.45 |
3.39 |
3.52 |
3.17 |
3.05 |
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% |
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% |
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% |
|
|
|
The calculations brief that the changes have lowered the risk of the portfolio (Zimmerman & Yahya-Zadeh, 2011).
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.
Ward, K. (2012). Strategic management accounting. Routledge.
Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.
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