Finance Question and Answer 2022

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Finance

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Table of Contents
1..................................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................3
c).............................................................................................................................................3
d)............................................................................................................................................4
e).............................................................................................................................................4
f).............................................................................................................................................4
Question 2..................................................................................................................................5
a).............................................................................................................................................5
b)............................................................................................................................................5
Question 3..................................................................................................................................6
a).............................................................................................................................................6
References..................................................................................................................................8
Appendix....................................................................................................................................9

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1.
a)
The loan which is taken by the company is required to be ascertained and for that, the
provided data in relation to the amount which is paid as installments will be taken into
account. There is a period of 5 years in which the loan will be repaid in the monthly
instalments and the calculation for the same is as provided hereunder:
Particulars Amount
amount of Instalment 891
Period 60
Interest rate 0.5
The present value of
borrowings
46087.47
b)
The company is making sales and the same is increasing at a constant rate in all the years. For
that, the calculation will be made and with that, the amount of sales which will be made in 5
years will be determined.
Particulars Amount
Annual revenue 247.7
Time period 5
Annual growth
rate
9.90%
Future value
multiplier
1.603
Sales in 5 years 397.11
c)
The APR is provided for the various options of the loan that are available and on that basis,
there will be the determination of the effective interest rate. There is the time period that is
provided and it will be adjusted as per the compounding frequency.
Particulars APR Period EAR
Loan A 5.45% 12 5.59%
Loan B 5.50% 2 5.58%

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Loan C 5.40% 365 5.55%
In the given case the calculation shows the minimum effective rate for loan C and that will be
considered by the business due to the least cost.
d)
In the company there are investments that are made for further growth and investment and
BLX has made the same for the property. In this, the loan amount has been provided and with
the help of that, the instalment amount will be calculated in an adequate manner.
Particulars Amount
Loan amount 1650000
Rate 2.1
Period 40
Instalment 61379.81
e)
The bonds are involved with a coupon rate that is paid on them and that is considered to
ascertain the interest amount. The yield to maturity will be calculated by taking into use the
interest amount, maturity period and the current price of the bond.
Particulars Amount
Face value 1000
Coupon rate 5.85%
Interest 58.5
Maturity 6
Current price 922
YTM 7.51%
f)
The market value of the bond will be calculated and for that, there is the consideration of
maturity and the required rate which is involved.
Particulars Amount
Face value 100
Maturity 4
Coupon rate 5%
Required rate 5.80%

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Interest 2.5
Market value -97.18
Question 2
a)
The company provides the return on equity and the rate for the same is to be calculated. The
Capital asset pricing model is one of the methods which can be used and will be taken into
account in the current situation (Zabarankin, Pavlikov and Uryasev, 2014). The calculation is
shown below which is made in this respect and under this, the available formula for the
CAPM is used.
Particulars BLX Hypothetical
company
Risk free rate (Rf) 0.68 0.68
Beta (b) 0.94 1.6
Market risk premium
(Rp)
5.5 5.5
CAPM Rf + b*Rp
Expected return 5.85 9.48
b)
The investment is made in the portfolio as by that the diversification is made possible. In
order to evaluate the position, there is the need to ascertain the return and risk which is
involved with the same. The calculation is made by using the appropriate formula specified in
this respect.
Particulars Weights Expected
return
Beta Weighted
return
weighted
beta
BLX 0.7 5.85 0.94 4.095 0.658
Hypothetical
company
0.3 9.48 1.6 2.844 0.48
Portfolio return 6.94
Portfolio beta 1.14

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Question 3
a)
All the investments which are to be made require the proper evaluation and in that there is the
involvement of various aspects. The company is involved in the lighting business and is
providing the products in international markets. There are various products that are involved
with the company and are performing in various parts of the world (Barone et al., 2019). In
the making of the best decision, an investor considers the risk which will be involved and the
return which will be made available after undertaking the required risk. The concept of risk
and return are interrelated and they both so simultaneously. The decision which will be made
will be affected by both of them and if there will be a modification in one then the other will
also change.
To consider this there is the undertaking of the proper approach and then the risk and return
which are involved are to be evaluated. In the current company BLX there is the
consideration of the risk and return and it has been identified that the beta of the company is
0.94 and with that, the return of 5.85% is being made (Capitaliq, 2020). This shows that with
the moderate risk there is a limited return which is made. The hypothetical company is taken
into account so that the comparison can be made. The beta of that is high at 1.60 and with
that return is also high at 9.48%. This represents the positive relationship which is present
among the risk and returns which remade by the company. As the risk of the company is high
so the return which is made on the same is also at a high rate.
It is specified under the portfolio theory that the investment shall be made in the portfolio as
with the help of that there is the diversification that is made and that is beneficial to eliminate
the risk to certain risks. In the total risk, there are two components that are involved and they
are systematic and unsystematic risk (Penman and Zhu, 2014). Out of them, the systematic
risk is the one that is based on fixed factors and cannot be eliminated. They will remain stable
and the company has the option to reduce the risk which is unsystematic. This will be made
possible with the diversification of the portfolio in which the risk at various levels will be
involved and will help in eliminating the major portion.
The company has been considering this and for that, the portfolio with the stock of BLX and
hypothetical company is made. In that one is with high risk and others with a lower level of
risk. They are combined and with that, the average risk is made to be moderate. The risk in

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relation to the portfolio is calculated and it is derived at 1.14 (Capitaliq, 2020). This is the
risk that is obtained and with that, the return is also calculated. The portfolio is earning a
return of 6.94% which is covering the market return in an effective manner. The return which
is made is between the return that is identified for BLX and hypothetical company
individually. The beta is evaluated with the standards which are set for the same and
according to them if the beta will be more than then it will be considered to be an aggressive
stock and with high risk. The beta of less than 1 denotes the lower risk and such stocks are
defensive. In that much risk is not involved and it is required to be included in the portfolio
The portfolio which is made in the current case is in the ratio of 70% and 30% which are
allocated to the BLX and hypothetical company respectively. The higher share is of BLX and
due to that, the beta will be containing the major section of this. The results which are
attained denote that the risk and returns are affected by each other (Koerselman and Uusitalo,
2014). The return which is made on the portfolio is as per the risk associated and for that
there is the consideration of the capital asset pricing model. In that the risk-free rate and risk
premium both have been accounted for along with the beta of the portfolio. This ensures the
consideration of important elements and by that required results are attained. The rate which
is identified with the help of this model is considered to be the most reliable and helps in
evaluating the situation in an adequate manner (Theodossiou and Savva, 2016). The risk is
between the level of BLX and hypothetical and with that return is also made accordingly.
There is a high relationship that is involved and for that, adequate consideration shall be
made on them.
The decision which will be taken by the company will be based on the facts which are
discovered and in that beta is high at 1.14 which shows the aggressiveness of the portfolio to
the market and the returns will also be as aggressive as this. There will be involvement of all
of these aspects in the decision-making process and by that the company will be gaining the
best returns which are possible. The complete understanding has been obtained and in that, all
of the required aspects have been taken into account. The risk which is involved will be
eliminated to possible limits and this will enhance the returns in the required manner.

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References
Baron, M., Brogaard, J., Hagströmer, B. and Kirilenko, A. (2019) Risk and return in high-
frequency trading. Journal of Financial and Quantitative Analysis, 54(3), pp.993-1024.
Capitaliq. (2020) Australia Government Debt Interest Rate Profile. [Online] Available at:
https://www.capitaliq.com/CIQDotNet/MacroEconomics/InterestRate.aspx?
companyId=50027527 [Accessed 14 April 2020]
Capitaliq. (2020) Beacon Lighting Group Limited (ASX: BLX) Public Company Profile.
[Online] Available at: https://www.capitaliq.com/CIQDotNet/company.aspx?
companyId=260249793 [Accessed 14 April 2020]
Koerselman, K. and Uusitalo, R. (2014) The risk and return of human capital
investments. Labour Economics, 30, pp.154-163.
Penman, S.H. and Zhu, J.L. (2014) Accounting anomalies, risk, and return. The Accounting
Review, 89(5), pp.1835-1866.
Theodossiou, P. and Savva, C.S. (2016) Skewness and the relation between risk and
return. Management Science, 62(6), pp.1598-1609.
Zabarankin, M., Pavlikov, K. and Uryasev, S. (2014) Capital asset pricing model (CAPM)
with drawdown measure. European Journal of Operational Research, 234(2), pp.508-517.

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Appendix

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