Interest Rate and Return on Equity Calculations

The assignment content consists of two parts: Part e and Part f. Part e discusses the calculation of the yield to maturity of a bond with a semi-annually compounding interest rate of 3.4289%. The part also explains that the yield is calculated based on the bond's par value, market value, number of years to maturity, annual interest rate, and term. The answer to question 2 calculates the cost of equity using the CAPM (Capital Asset Pricing Model) formula. Part f discusses the calculation of the return on equity for two companies, COH Cheese and a hypothetical company, based on their beta values. The part highlights the importance of considering beta in calculating the return on equity and explains that the CAPM is a suitable method for estimating the return on equity.

Finance
Name of the Student:
Name of the University:
Authors Note:

Table of Contents
Answer to question 1:.................................................................................................................3
Answer to question 2:.................................................................................................................7
Answer to question 3:.................................................................................................................9
Bibliography.............................................................................................................................11

Answer to question 1:
Answer to part a:
In the given case, the question asks about the present values of the all instalment
payment that will be received by the company. The company has initiated a sale but the
payment will be received in 48 equal instalment. To meet its needs the company needs to
discount the payment receivable form the bank. When the rate of discount is 7% compounded
monthly, the payment will be calculated by calculating the Present values of annuity
compounding on monthly basis. Further, as the interest is compounding monthly therefore the
monthly interest rate is required to be considered.
Rate Of Discount 7%
compounding Monthly
Instalment per month 10000
payment Period 48
Monthly Interest rate 0.583%
Present valve of monthly instalments (Annuity) 417602.0141
The Data Of the COH Cheese is as follows:
COH
Case Company Data
Instalment Per Month 15700
Annual Total Revenue ($ millions) 1363.7
Annual Growth in total Revenue 12.60%
Loan A ( APR Compounding Frequency) 6.480%
Loan b ( APR Compounding Frequency) 6.45%
Loan C ( APR Compounding Frequency) 6.52%
Property Cost 8,29,000.00
8 Year Bond annual coupon rate 6.15%
8 year current price 100.50

6 yrear Bond Required rate of Return 3.40%
Part b:
In the given assignment if the growth rate of the company is 12.60% per year and the
current income is $ 1363.7 therefore by calculating the Future value of the current income on
a growth rate of 12.60% is required to be calculated. This can be calculated by finding the
future value of the current income.
Current rate of Revenue 1363.7
Annual Growth Rate 12.60%
Years 5
Revenue at year 5 2468.37
Part c:
In the given case three loan options are given that is Loan A, Loan B, Loan C all the loan
options consist of different interests rate and different compounding procedures. In addition
to that, the entire loan amount is same in all options. Therefore, we are required to calculate
the effective rate of interest rate. The effective rate of Interest will be useful to evaluate the
plan to be accepted. The effective rate will differ from the annual rate based on the number of
time it is compounding.
Borrowing Options A B C
Loan Amount 6.48% 6.45% 6.52%
Mode Of payment quarterly daily
semi
annually
Term 4 365 2

Effective Interest rate ® 6.64% 6.66% 6.63%
Part d:
The given case the loan of the property amounts to be $ 829000 ate the interest rate of 6.15%
%. The quarterly payment towards the principal along with the interest will be paid $
27901.12 then the loan will amortise at the end of 8th year.
Loan amount 8,29,000.00
Interest Rate 6.15%
Compounding Quarterly
Term (quarterly) 40
term Monthly 120
Interest rate per quarter 1.54%
Quarterly payment 27901.12
Part e:
The yield to bonds are calculated when the value of the bonds are 100 with semi-annually
compounding there got the effective rate of interest required to be calculated to maturity of
the bonds.
par value 100
market Value 100.50
Number of years to maturity 8
Annual interest rate 3.4%
Semi Annual interest 1.7%
term 2
Interest 3.4289
Yield to Maturity 0.0336

Part f:
In the given case as the interest is compounding semi-annually therefore, we are required to
calculate the semi-annual interest fairs and after that, he return is to be calculated. In addition
to after asserting the semi-annual interest, the coupon payment will be considered.
par value 1000
market Value 117
Number of years to maturity 6
Annual interest rate 7.0%
Semi Annual interest 3.5%
term 2
Interest 71.225
ROI 3.40%
Coupon Payment 35.0000
Answer to question 2:
In the said question, the cost of equity will be calculated on the CAPM or capital assets
pricing model.
To calculate this the following information are required to be considered
RA Risk Free Return on Share
Rrf Risk Free Rate
Ba Beta Of the Security
Rm Expected Return of the market
COH : Case 1 where the beta is 0.86(five years)

RA Risk Free Return on Share COH
Rrf Risk Free Rate 1.97%
Ba Beta Of the Security 0.5
Rm Expected Return of the market 6%
return on equity 3.99%
Case 2:
In the given case a bets of -0.2 is taken for the hypothetical company.
RA Risk Free Return on Share HYPO
Rrf Risk Free Rate 1.97%
Ba Beta Of the Security -0.2
Rm Expected Return of the market 6%
return on equity 1.16%
In the given case for the hypothetical company the bets are -.2 therefore the return on
equity becomes inferior to the earlier.
Answer to question 3:
In the following part of the study, the discussion will be made taking into consideration the
difference of the share return (Return on equity) investment of the company for the COH
Cheese and the hypothetical company. In the given case all, the other matter except beta is
constant; therefore, the main factor that segregates the rate of earning on the investment
depends on the bets. Beta is defined the measure of the risk that is associated with the
investment policy. The risk free rate is that rate of return on which the investors are required
to take no risk. The risk free investments are government bonds and others where the investor
is not required to take any significant risk. Additionally the risk premium is the rate of

earning that is more than the risk free rate. In the given case, the risk free rate is 1.97% on
Australian bonds whereas the Risk premium is 6%. The bets is the measure of the risk that
the investor is ready to bear for the additional income of (6- 1.96) = 4.04%. The rate of return
in the case 2 of the question a becomes inferior as the beta is negative this stimulates the no
risk function on the investment. Irrespective of the fact, the CAPM or the Capital Asset
Pricing model is the best method of calculating the return on equity among the all other
methods. Furthermore, all of the factors that are considered for the CAPM analysis are related
to the variable market data that are depended on the marketing forces. In addition to that that
the risk or the Beta is calculated on the 5 years return and other factors. In addition, the Risk
premium is ascertain by the historical return on investment of the company. The risk free
return rate is also considered importance in analysing, as it is inter related with the bets as the
investor is willing to take additional risk to earn more income. If a beta is one then it will be
said there is no risk involved in the investment. A no risk investment is that government
bonds of Australia. There are money bonds that are offered by government of Australia. For
the hypothetical company the Beta is lowered to -0.2. As all other factors are remaining same.
In addition to the negative Beta is a myth. The negative beta means the investor will get
assured more income than the risk free rate of return but that do not happen in the actual or
real markets. The CAPM is calculated by computing the = Risk Free rate of Return +
(BETA* (risk Premium – Risk free rate of return))
The presented formula showcase that the return earning capacity of the said investment is
decided by the Risk Free rate plus the Risk probability (Beta) of the additional risk Premium
rate.
Further, the CAPM does not compute the Return on Equity for the company rather it is the
return that the shareholder could accept. Further, it is to be noted the actual return may be
different or similar to the return.

Company Coh Hypo.
Share 10000 10000
Beta 0.5 -0.2
Expected rate of return 3.99% 1.16%
Return (expected) 398.5 116.4

Bibliography
Banks, E. (2015). Finance: the basics. Routledge.
Brunnermeier, M. K., & Sannikov, Y. (2016). The I theory of money (No. w22533). National
Bureau of Economic Research.
Lagoarde-Segot, T. (2015). Diversifying finance research: From financialization to
sustainability. International Review of Financial Analysis, 39, 1-6.