Business Finance

This document provides study material and solved assignments for Business Finance. It includes calculations of portfolio return, risk to reward ratio, computation of NPV, cash flow statement, and interpretation of the results. The document also includes references for further reading.

BUSINESS FINANCE

TABLE OF CONTENTS
Question 1........................................................................................................................................1
a)..................................................................................................................................................1
b)..................................................................................................................................................1
Question 2........................................................................................................................................2
REFERENCES................................................................................................................................4

Question 1
a)
SHARES Beta STD (annual)
Forecast for
June 2020
Dividend Stock Price
A 0.5 40.00% $1.50 $50
B 2 45.00% $0.85 $100
C 0 15.00% $1.65 $35
Calculation of portfolio return
Computation of portfolio return
Shares Beta
E(Ri) = rf
+βx(E(RM)-
rf)
Investment
in portfolio Re
A 0.5 6.25 0.3 1.875
B 0.2 4 0.5 2
C 0 2.5 0.2 0.5
Portfolio
Return 4.375
b)
Risk to reward ratio depicts the prospective reward that an investor could earn. Many of
the investors make use of reward and risk ratios for comparing expected return of investment
with an amount of the risk that they might undertake for earning these returns. Comparing the
market and actual return with that of the risk to reward ratio, pricing of the stock can be analysed
in the effective and appropriate way. This helps in determining the correct price which leads to
generation of maximum or potential returns from the portfolio or different kinds of shares.
Shares
Risk to reward
ratio
Actual Market
return
Expected
return Stock price Alpha
A 7.50% 6.00% 1.88% $50 0.31%
B 7.50% 10.00% 2.00% $100 0.60%
C 7.50% 1.00% 0.50% $35 0.04%
Interpretation- From the above table it has been represented that the price of all the
shares has been adequately priced as all are generating positive return. It shows that by making
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use of risk to reward ratio and spotting the market return of each and every share, it has been
assessed that the prices of all the stocks are correctly priced because adequate amount of the
return is been attained at each type of the shares. This clearly reflects that the actual return
resulted is more than the expected or market return and this results to better management of risk
by earning high return. Alpha indicates that for identifying high possible rate of return associated
to the least amount of risk.
Question 2
Computation of NPV
Year Cash inflows
PV factor
@ 14%
Discounted cash
inflows
1 399940 0.877 350824.56
2 405400 0.769 311942
3 410860 0.675 277319
4 405400 0.592 240029
Total
discounted
cash inflow 1180115
Initial
investment (1000000+130000) 1130000
NPV (Total
discounted
cash inflows -
initial
investment) 50115
Cash Flow statement
Cash Flows statement
Sales
Variable
Cost
Contributi
on Fixed cost
Depreciat
ion Profit
Profit
after tax
@ 30%
Cash
Flows =
Profit+De
preciation
890000 195800 694200 230000 250000 214200 149940 399940
900000 198000 702000 230000 250000 222000 155400 405400
910000 200200 709800 230000 250000 229800 160860 410860
900000 198000 702000 230000 250000 222000 155400 405400
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Calculation of depreciation
Depreciation
Cost 1000000
Useful Life 4
Depreciation 250000
Interpretation
In the present case Ma is coming with new product of slow cook meat sauce for
providing superior spaghetti sauce cooked over longer period. Company has paid amount of
130000 for market survey to determine viability of products inclusive of the prices and projected
sales. For the new product company Ma is required to have cooker and bottling line that costs
$1000,000. therefore the total cost of project is 1000,000 plus cost of marketing as it is also made
for the project. The project will be viable if the cash flows generated are enough for recovering
the cost of investments. The company will be required to calculate the cash flows from the
project after estimating the sales from the project. The variable cost are estimated to be 22% of
the projected sales. After the tax is deducted from the profit company will add back depreciation
for getting actual cash flows from the project. The feasibility of the project is identified by
carrying out NPV analysis.
As per NPV analysis project is profitable if the NPV of the project is positive. It is calculated by
comparing the cost of project with estimated present value of future cash flows. In the present
case project is having positive NPV of $50115 which shows that the company will be earning
profits from the project. As per the outcomes of the analysis company should accept the project.
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REFERENCES
Books and Journals
Online
[Online]. Available through : <>.
[Online]. Available through : <>.
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