Financial Decisions, Loan Repayment, Portfolio Returns and Bond Valuation

BUSINESS FINANCE
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Question 1
a) There are various financial decisions that need to be taken by a finance manager in any
company. These include decisions related to capital allocation, budgeting along with
financial planning and raising finance is required. Capital allocation refers to the
distribution of capital to profitable projects so as to maximise returns on investment.
Further, budgeting implies that adequate financial planning and control ought to be done
through budgets. Also, it is imperative that adequate financial resources must be available
to the company’s disposal so that the business activities and expansion can continue.
These are key functions which tend to ensure that the company is able to achieve the
stated objectives (Parrino et.al., 2013).
b) One of the key financial decisions to be taken by financial manager pertains to allocation
of capital or capital budgeting. This typically involves new projects where it is imperative
to choose amongst the available choices since it may be difficult to pursue all projects.
Thus, the financial manager needs to conduct analysis of these projects based on estimate
future cash flows using capital budgeting techniques such as IRR and NPV (Arnold,
2015).
Another important financial decisions taken by the financial manager pertains to budgeting
where the budget estimates need to be done considering a host of factors including the past
performance of the firm and the existing environmental conditions. Budget is a key tool for
performance management, control and hence needs to highlight realistic estimates of the
future performance (Detsher, 2016).
Financial resources are required for the company to run the business both in the form of
working capital and term loan. The cash management needs to be performed for ensuring that
the firm does not face any cash crunch. Also, money should be arranged in a timely manner
to meet any shortfalls for implementing the proposed projects (Parrino et.al., 2013).
c) With regards to capital allocation, consider a mining firm which is planning to invest $ 1
billion in a particular mine oversees. As a financial manager, analysis of the investment
needs to be performed using suitable capital budgeting techniques so as to opine on
whether the investment should happen or not (Arnold, 2015).

In relation to budget, the key decisions pertain to making future estimates regarding the
estimates revenues and expenses based on the current year performance and host of factors
that may influence firm performance. Besides, an example of decision pertaining to raising
finance could be in the form of which financial source should be availed for raising capital to
the extent of $ 500 million say for funding an acquisition. It could be in the form of both debt
and equity and thus the financial manager need to decide how much debt and equity should
be raised considering capital structure and financial position of the company (Payne &
Gullifer, 2015).
Question 2
a) The property is priced at $ 1.8 million and 50% of this amount would be paid through
personal deposits. Hence, the loan amount to be taken = 0.5*1.8million = $ 0.9 million.
However, there is a loan application fees for each of the two banks and this amount would
be added to the total amount borrowed.
(i) Bank A
Loan application fee = $500
Loan assumed for property purchase = $0.9million or $900,000
Hence, amount borrowed = Loan application fee + Loan taken = 500 + 900000 = $900,500
(ii) Bank B
Loan application fee = $250
Loan assumed for property purchase = $0.9million or $900,000
Hence, amount borrowed = Loan application fee + Loan taken = 250 + 900000 = $900,250
(b) The formula for computation of instalment for repayment of loan is given below.
Instalment amount = [P x R x (1+R)N]/[(1+R)N-1]