Business Finance: Cost of Building, Bond Valuation, Risk Analysis, Investment Appraisal

This article covers various topics in business finance such as cost of building, bond valuation, risk analysis, and investment appraisal. It includes solved examples and calculations for each topic. The article also discusses the impact of systematic and unsystematic risks on investments and the calculation of payback period, net present value, and internal rate of return. The subject and course code are not mentioned.

Running Head: Business Finance
Business Finance

Business Finance 1
Table of Contents
Question 1.............................................................................................................................................3
Part 1.................................................................................................................................................3
Part 2.................................................................................................................................................3
Part 3.................................................................................................................................................3
Part 4.................................................................................................................................................3
Part 5.................................................................................................................................................3
Part 6.................................................................................................................................................4
Part 7.................................................................................................................................................4
Part 8.................................................................................................................................................4
Part 9.................................................................................................................................................4
Question 2.............................................................................................................................................5
Part a..................................................................................................................................................5
Part b.................................................................................................................................................5
Part c..................................................................................................................................................5
Question 3.............................................................................................................................................6
Question 4.............................................................................................................................................7
Question 5.............................................................................................................................................7
Part a..................................................................................................................................................7
Part b.................................................................................................................................................8
Part c..................................................................................................................................................8
Part d.................................................................................................................................................8
Question 6...........................................................................................................................................10
Part a................................................................................................................................................10
Part b...............................................................................................................................................10
Part c................................................................................................................................................11
Question 7...........................................................................................................................................12
Question 8...........................................................................................................................................13
Part a................................................................................................................................................13
Part b...............................................................................................................................................13
Part c................................................................................................................................................13
Part d...............................................................................................................................................14
Part e................................................................................................................................................15
Part f................................................................................................................................................15

Business Finance 2
Question 9...........................................................................................................................................16
Question 10.........................................................................................................................................17
Part a................................................................................................................................................17
Part b...............................................................................................................................................17
Part c................................................................................................................................................17
Part d...............................................................................................................................................17
Part e................................................................................................................................................17
References:..........................................................................................................................................18

Business Finance 3
Question 1
(Amount in $)
Cost of Building 25000000
Loan 80%
Loan amount 20000000
Years to maturity 10
Monthly repayment of loan
Interest (Yearly) 8%
Interest (Monthly) 0.67%
No. of instalments 120
Part 1
Monthly payment of loan
(Instalment) = Loan Amount
Cumulative present value factor(0-
120)
Instalment = 20000000
83.27807721
Instalment (Amount) = 240159.2432
Part 2
First Interest Payment 1,33,333.33
Part 3
First principle payment 1,06,825.91
Part 4
After making monthly payment for 3 Years
Amount overdue after 36 monthly instalment payment 1,55,34,059.74
Part 5
Amount left for repayment at the end of year 3 1,55,34,059.74
Cost of refinance 2,50,000
Total amount to be repaid 1,57,84,059.74
Interest (Annual) 7%
Interest (monthly) 0.583%
Years to Maturity 7
Total no. of instalments 84
Cumulative PVF 67.266
Instalment 2,34,651.83
Previous Instalment 2,40,159.24
Difference in loan payments 5,507.41
PV of the difference in loan payment 3,70,460.69

Business Finance 4
Part 6
Interest (annually) 8%
Interest (quarterly) 2%
Amount of loan 2,00,00,000.00
Years to maturity 10
No. of instalments 40
Cumulative PVF 28.35547924
Instalment 7,05,331.05
Part 7
Amount of loan overdue after 3 years of instalments payments 15576301.57
Part 8
Annual percentage rate on ten year loan (APR) 8%
Part 9
Effective Annual rate (1+i/n)^n-1
I 8%
N 12
Effective Annual rate 8.30%

Business Finance 5
Question 2
Face Value of Bond 100
Realisable value 78.12
Maturity 10 years
Part a
FV (Future Value) 100
PV (Present Value) 78.12
N 10
PV = FV/(1+r)^n
78.12 = 100/(1+r)^10
(1+r)^10 = 1.2800819
1+r = 1.0249998
R = 0.0249998
R = 2.50%
Part b
FV (Future Value) $ 100.00
R 3.50%
N 9
PV = FV/(1+r)^n
PV = $ 73.37
Loss = $ 4.75
Part c
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%

Business Finance 6
Question 3
Price of shares today
D1(Dividend) 3.28
G (Growth rate) 5%
Ke (Cost of Equity) 11%
Po (current price) = D1/(Ke-g)
Po = 54.67
Rate of return
D1 (Expected dividend) 3.7
Po 54.67
G 0.05
Ke ?
Ke = (D1/Po)+g
Ke = 12%

Business Finance 7
Question 4
a) Janet Yellen retires as Chairman of the Federal Reserve and Arnold Schwarzenegger
is appointed to take her place. (Systematic Risk)
b) Martha Stewart is convicted of insider trading and is sentenced to prison.
(Unsystematic risk)
c) An OPEC embargo raises the world market price of oil. (Systematic Risk)
d) A major consumer products firm loses a product liability case. (Unsystematic Risk)
e) The US Supreme Court rules that no employer can lay off an employee without first
giving 30 days’ notice. (Systematic Risk)
Question 5
Initial
investment 85,000.00
Useful Life 5Years
Cost of Capital 0.12
Year Cash Flows
1.00 18,000.00
2.00 22,500.00
3.00 27,000.00
4.00 31,500.00
5.00 36,000.00
Part a
Payback Period
Year
Cash
Flows
Cumulative cash
Flows
1.00 18,000.00 18,000.00
2.00 22,500.00 40,500.00
3.00 27,000.00 67,500.00
4.00 31,500.00 99,000.00
5.00 1,35,000.00

Business Finance 8
36,000.00
Payback
Period = 3.56
Part b
Year
Cash
Flows PVF @ 12%
PV of cash
flows
-
-
85,000.00 1.00 -85,000.00
1.00 18,000.00 0.89 16,071.43
2.00 22,500.00 0.80 17,936.86
3.00 27,000.00 0.71 19,218.07
4.00 31,500.00 0.64 20,018.82
5.00 36,000.00 0.57 20,427.37
NPV 8,672.54
Part c
Year
Cash
Flows PVF @ 20%
PV of cash
flows
PVF @
15%
PV of cash
flows
-
-
85,000.00 1.00 -85,000.00 1.00 -85,000.00
1.00 18,000.00 0.83 15,000.00 0.87 15,652.17
2.00 22,500.00 0.69 15,625.00 0.76 17,013.23
3.00 27,000.00 0.58 15,625.00 0.66 17,752.94
4.00 31,500.00 0.48 15,190.97 0.57 18,010.23
5.00 36,000.00 0.40 14,467.59 0.50 17,898.36
NPV -9,091.44 1,326.93
IRR = 16%
IRR = LDR+ NPV- NPV at LDR *(HDR-LDR)
NPV at LDR- NPV at HDR
Part d
The investment can be done in this project as NPV of the project is positive and the IRR is
more than the company’s rate of return. The company can implement the project as the NPV
and IRR both have positive implication on the acceptability of the project. Positive NPV

Business Finance 9
shows that companies’ profits will increase gradually with the acceptance of the project
(Petty, Titman, Keown, Martin, Martin & Burrow, 2015).
* Payback Period= Base Year+ Cumulative cash flows of previous year
Cash Flows of Base Year

Business Finance 10
Question 6
Discount
rate 15%
Part a
Year
Renovate
(X)
Replace
(Y) PVF @ 15%
PV of cash flows
of X
PV of cash
flows of Y
0
-
90,00,000.
00
-
10,00,000.0
0 1
-
90,00,000.00
-
10,00,000.00
1
35,00,000.
00 6,00,000.00
0.86956521
7 30,43,478.26 5,21,739.13
2
30,00,000.
00 5,00,000.00
0.75614366
7 22,68,431.00 3,78,071.83
3
30,00,000.
00 4,00,000.00
0.65751623
2 19,72,548.70 2,63,006.49
4
28,00,000.
00 3,00,000.00
0.57175324
6 16,00,909.09 1,71,525.97
5
25,00,000.
00 2,00,000.00
0.49717673
5 12,42,941.84 99,435.35
NPV 11,28,308.89 4,33,778.78
Ranking
Renovate I
Replace II
Part b
Year
Renovate
(X)
PVF @
20%
PV of Cash
Flows PVF @ 25%
PV of Cash
Flows
0
-
90,00,000.
00 1.00
-
90,00,000.0
0 1.00
-
90,00,000.00
1
35,00,000.
00 0.83
29,16,666.6
7 0.80 28,00,000.00
2
30,00,000.
00 0.69
20,83,333.3
3 0.64 19,20,000.00
3
30,00,000.
00 0.58
17,36,111.1
1 0.51 15,36,000.00

Business Finance 11
4
28,00,000.
00 0.48
13,50,308.6
4 0.41 11,46,880.00
5
25,00,000.
00 0.40
10,04,693.9
3 0.33 8,19,200.00
NPV 91,113.68 NPV
-
7,77,920.00
IRR 20.49%
Year
Replace
(Y)
PVF @
30%
PV of Cash
Flows PVF @ 40%
PV of Cash
Flows
0
-
10,00,000.
00 1.00
-
10,00,000.0
0 1.00
-
10,00,000.00
1
6,00,000.0
0 0.77 4,61,538.46 0.71 4,28,571.43
2
5,00,000.0
0 0.59 2,95,857.99 0.51 2,55,102.04
3
4,00,000.0
0 0.46 1,82,066.45 0.36 1,45,772.59
4
3,00,000.0
0 0.35 1,05,038.34 0.26 78,092.46
5
2,00,000.0
0 0.27 53,865.81 0.19 37,186.89
NPV 98,367.06 NPV
-
55,274.59
IRR 36%
Ranking
Renovate II
Replace I
IRR = LDR+ NPV- NPV at LDR *(HDR-LDR)
NPV at LDR- NPV at HDR
Part c
These rankings give mixed signals as NPV is the difference between initial investment and
present value of cash inflows and IRR is the rate at which PV of cash outflows (Initial
Investment is equal to Present value of cash inflows (Titman, Keown, & Martin, 2017)..

Business Finance 12
Question 7
Year Project A Project B Project C Project D Project E
- -20,000.00
-
6,00,000.00 -1,50,000.00 -7,60,000.00 -1,00,000.00
1.00 3,000.00 1,20,000.00 18,000.00 1,85,000.00 -
2.00 3,000.00 1,45,000.00 17,000.00 1,85,000.00 -
3.00 3,000.00 1,70,000.00 16,000.00 1,85,000.00 -
4.00 3,000.00 1,90,000.00 15,000.00 1,85,000.00 25,000.00
5.00 3,000.00 2,20,000.00 15,000.00 1,85,000.00 36,000.00
6.00 3,000.00 2,40,000.00 14,000.00 1,85,000.00 -
7.00 3,000.00 13,000.00 1,85,000.00 6,000.00
8.00 3,000.00 12,000.00 1,85,000.00 72,000.00
9.00 3,000.00 11,000.00 84,000.00
10.00 3,000.00 10,000.00
PVF @
15% PV of A PV of B PV of C PV of D PV of E
1.00 -20,000.00
-
6,00,000.00 -1,50,000.00 -7,60,000.00 -1,00,000.00
0.87 2,608.70 1,04,347.83 15,652.17 1,60,869.57 -
0.76 2,268.43 1,09,640.83 12,854.44 1,39,886.58 -
0.66 1,972.55 1,11,777.76 10,520.26 1,21,640.50 -
0.57 1,715.26 1,08,633.12 8,576.30 1,05,774.35 14,293.83
0.50 1,491.53 1,09,378.88 7,457.65 91,977.70 17,898.36
0.43 1,296.98 1,03,758.62 6,052.59 79,980.61 -
0.38 1,127.81 4,887.18 69,548.35 2,255.62
0.33 980.71 3,922.82 60,476.83 23,536.93
0.28 852.79 3,126.89 23,878.04
0.25

Business Finance 13
741.55 2,471.85 -
NPV -4,943.69 47,537.04 -74,477.85 70,154.48 -18,137.21
Project A, C and E have negative NPV. Hence, we can accept project B and D.
Question 8
Part a (Amount in $)
Year
Alpha
(Cash
Flows)
Cumulative
cash Flows
Beta (Cash
Flows)
Cumulative
cash Flows
Gamma
(Cash Flows)
Cumulati
ve cash
Flows
0
-
15,00,
000.00
-
15,00,000.0
0
-
4,00,000.00
-
4,00,000.00
-
75,00,000.00
-
75,00,000
.00
1
3,00,0
00.00
-
12,00,000.0
0 1,00,000.00
-
3,00,000.00 20,00,000.00
-
55,00,000
.00
2
5,00,0
00.00
-
7,00,000.00 2,00,000.00
-
1,00,000.00 30,00,000.00
-
25,00,000
.00
3
5,00,0
00.00
-
2,00,000.00 2,00,000.00 1,00,000.00 20,00,000.00
-
5,00,000.
00
4
4,00,0
00.00 2,00,000.00 1,00,000.00 2,00,000.00 15,00,000.00
10,00,000
.00
5
3,00,0
00.00 5,00,000.00
-
2,00,000.00 0 55,00,000.00
65,00,000
.00
Pay
Back
period 3.50 2.50 3.33
Part b
If cut off payback is 3 years then Beta is chosen and if cut of is 4 years then all the three can
be accepted.
Part c
Beta is to be chosen if the company wants shortest payback period.

Business Finance 14
Part d
Year
Alpha
(Cash
Flows)
PVF @
15%
PV of Cash
Flows
Cumulative
Cash Flows
0
-
15,00,
000.00 1.00 -1500000 -1500000
1
3,00,0
00.00 0.87 260869.5652
-
1239130.43
5
2
5,00,0
00.00 0.76 378071.8336
-
861058.601
1
3
5,00,0
00.00 0.66 328758.1162
-
532300.484
9
4
4,00,0
00.00 0.57 228701.2982
-
303599.186
7
5
3,00,0
00.00 0.50 149153.0206
-
154446.166
1
Discounted
payback
Period 0
Year
Beta
(Cash
Flows)
PVF @
15%
PV of Cash
Flows
Cumulative
cash flows
0
-
4,00,0
00.00 1.00 -400000 -400000
1
1,00,0
00.00 0.87 86956.52174
-
313043.478
3
2
2,00,0
00.00 0.76 151228.7335
-
161814.744
8
3
2,00,0
00.00 0.66 131503.2465
-
30311.4983
2
4
1,00,0
00.00 0.57 57175.32456
26863.8262
4
5
-
2,00,0
00.00 0.50 -99435.34706
-
72571.5208
2
Discounted
payback
0

Business Finance 15
Period
Year
Gamm
a
(Cash
Flows)
PVF @
15%
PV of Cash
Flows
Cumulative
cash flows
0
-
75,00,
000.00 1.00
-
75,00,000.00
-
75,00,000.0
0
1
20,00,
000.00 0.87 17,39,130.43
-
57,60,869.5
7
2
30,00,
000.00 0.76 22,68,431.00
-
34,92,438.5
6
3
20,00,
000.00 0.66 13,15,032.46
-
21,77,406.1
0
4
15,00,
000.00 0.57 8,57,629.87
-
13,19,776.2
3
5
55,00,
000.00 0.50 27,34,472.04
14,14,695.8
1
Discounted
payback
Period 4.48
If cut off period is 4years then none of the project is accepted.
Part e
Beta should be rejected, but if company uses payback analysis then can be accepted.
Part f
Gama can be accepted, but might be rejected if company uses payback analysis.
* Payback Period= Base Year+ Cumulative cash flows of previous year
Cash Flows of Base Year
(Brooke, 2016).

Business Finance 16
Question 9
a) Quick ratio measures the short term liquidity of the company. The ratio defines the
company’s most liquid assets which can be used to repay the accounts payables of the
company.
b) Cash ratio signifies the cash available with the entity to repay its outstanding amounts
and current liabilities. In short it shows the cash available in hand and at bank.
c) The capital intensity ratio signifies the amount invested by us will generate how much
return in comparison to sales of the company (Bandy, 2014).
d) Total asset turnover ratio shows the ratio between firm’s total assets and sales
(Revenue).
e) Equity multiplier represents the amount of leverage for the investors of the firm in
equity; it measures the worth of firm assets for the benefit of investors (Brigham &
Daves, 2014).
f) Long-term Debt Ratio: Long-term debt ratio shows the ration between firms debt and
equity component.
g) Times interest earned ratio shows a relation between the firms operating earnings and
current interest obligations (Sharan, 2015).
h) Profit margin shows the percentage of return over sales (McKinney, 2015).
i) Return on assets shows the percentage of profit in comparison to total assets.
j) Return on equity shows the relation between the firms profit and owners’ equity.
(Barr & McClellan, 2018).
k) Price-earnings ratio shows the ratio between the market price and EPS of the shares.

Business Finance 17
Question 10
Part a
Rf 4%
Rm 12%
Name of Company Investment ($ Million)
Bet
a Rate of Return
Fire 2 0.85 10.80%
Water 3 1.25 14.00%
Air 5 1.6 16.80%
Total 10
Part b
Rate of Return of portfolio 14.76%
Part c
Beta of Portfolio 1.345
Rate of Return using CAPM 14.76%
Part d
Name of Company Investment ($ Million)
Bet
a Rate of Return
Fire 0 0.85 10.80%
Water 4 1.25 14.00%
Air 6 1.6 16.80%
Total 10
Rate of Return of Portfolio 15.68%
Weighted Beta 1.46
Rate of Return of Portfolio using
CAPM 15.68%
Part e
The above change indicates that if the investment in the Fire company is called by the
investor then the return is increasing and risk and return are positively correlated that means
that the risk will also increase (Titman, Keown & Martin, 2017).

Business Finance 18
References:
Bandy, G. (2014). Financial management and accounting in the public sector. Routledge.
Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher
education. John Wiley & Sons.
Brigham, E. F., & Daves, P. R. (2014). Intermediate financial management. Cengage
Learning.
Brooke, M. Z. (2016). Handbook of international financial management. Springer.
McKinney, J. B. (2015). Effective financial management in public and nonprofit agencies.
ABC-CLIO.
Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015).
Financial management: Principles and applications. Pearson Higher Education AU.
Sharan, V. (2015). Fundamentals of Financial Management, 3/e. Pearson Education India.
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial management: Principles and
applications. Pearson.