Finance: TVM and Bond Valuation, Risk and Return Estimates, Risk and Return Analysis of a Company

This document provides answers to questions related to TVM and bond valuation, risk and return estimates, and risk and return analysis of a company. It includes calculations and analysis for each question.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Author’s note:

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Table of Contents
Answer to question 1: TVM and Bond valuation............................................................................2
Sub part (a):.................................................................................................................................2
Sub part (b):.................................................................................................................................2
Sub part (c):.................................................................................................................................2
Sub part (d):.................................................................................................................................3
Sub part (e):.................................................................................................................................3
Sub part (f):..................................................................................................................................4
Answer to question 2: Risk and return estimates.............................................................................4
Sub part (a):.................................................................................................................................4
Sub part (b):.................................................................................................................................5
Answer to question 3: Risk and return analysis of the company:....................................................5
Overview of the company:...........................................................................................................5
Financial Performance:................................................................................................................5
Risk and Return measures of the company:..............................................................................12
Conclusion and recommendation:.............................................................................................13
References and bibliography:........................................................................................................14

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Answer to question 1: TVM and Bond valuation
Sub part (a):
Computation of Discounted value of the instalments
Monthly Instalment Amount $ 10,000
Number of years 4
Number of Payment per year 12
Annual Discount rate 7%
Discounted Value of the instalment $ 4,17,602
In computation of the present value of the installments, a discount rate of 7% has been
considered and a total number of 7 years have been taken. The present value of the installments
over the period is the discounted value, which the bank can allow.
Sub part (b):
Computation of Expected Revenue in 5 years with a
7.40 % growth rate
Annual Operating Revenue $ 1,438.28
Annual growth rate 7.40%
Number of Years 5
Expected annual revenue in 5 years $ 2,055.25
To arrive at the sales of the fifth year, annual sales have been compounded with the
annual growth rate. As the growth will be assumed annually, the compounding technique has
been used to arrive at the expected sales in the fifth year.
Sub part (c):
Computation of Effective Annual Interest Rates for the following loans
Loan A Loan B Loan C
Loan Amount 7.00% 7% 6.97%
Compounding terms Semi-annually Monthly Quarterly

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Compounding period in a year 2 12 4
Effective annual interest rate (EAR) 7.12% 7.18% 7.15%
Effective annual rate of interest is the equivalent rate of the same interest payment as paid
throughout the year in all those above interest-compounding periods. It can be compounded by
taking into consideration the total annual affect of the interest. The same compounding and
discounting technique has been used to compute the effective interest annually.
Sub part (d):
Computation of Instalment amount for the purchase of
property
Value of the property $ 8,11,000
Annual Interest rate 3.80%
Number of years 10
Number of payments per year 4
Quarterly Instalment Amount $ 24,466
To compute the amount of monthly installment per quarter, which is required to be paid
for purchasing the property with a financing option, the annual interest rate is converted into
quarterly interest rate as the value of the loan as the full value of the property has been
considered. The installments will be paid quarterly and hence the interest rate is to be considered
quarterly. The installment amount can be computed by compounding those figures as $24,466
per quarter.
Sub part (e):
Computation of Yield to maturity of the bond
Par value of the bond 100
Years till maturity 8
Annual coupon rate 5.60%
Current price 117

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Yield to maturity 3.16%
Yield to maturity means the total return as a percentage of the investment, which can be
earned by holding the investment till the maturity. The present value of the investment is more
than the face value; it means the investor will be realizing a less amount than his investment
from the capital yield. Hence, the total yield to maturity becomes less than the coupon rate. From
such type of an investment a total of 3.16% can be earned by holding it till the maturity.
Sub part (f):
Computation of Coupon payment for a required rate of return
Par value of the bond $ 1,000
Years till maturity 6
Number of payments per year 2
Annual coupon rate 7.00%
Required rate of return 4.10%
Current price $ 1,153
Coupon payment $ 51
To compute the Coupon payment of the bond, Firstly, the present value of the bond is
calculated by considering the required rate of return, and then, the coupon payment has been
calculated by applying the PMT formula and taking the coupon rate.
Answer to question 2: Risk and return estimates
Sub part (a):
Computation of Expected rate of return Under CAPM
model
Particulars BGA Hypothetical
Company
Risk free rate 1.94% 1.94%

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Market risk premium 6% 6%
Risk coefficient (Beta) 1.23 -0.2
Expected return 9.32% 0.74%
The risk free rate has been taken as the yield to maturity of 10 years Australian bond as
per recent sources and records. The risk coefficient of the company or the company beta has
been taken as 1.23 as per the recent source as on 20 April 2019. Taking all those risk factors and
applying the CAPM model the expected rate of return of the company has been computed as
9.23%. It can be evidenced that the risk coefficient of the company is higher that is why the
expected rate of return is higher. On the other hand, as the second company is having a negative
risk coefficient, the expected rate of return is very low.
Sub part (b):
Computation of portfolio beta and expected return
Percentage of shares in the portfolio 50% 50%
Expected Return 9.32% 0.74%
Beta of the company 1.23 -0.2
Weightage of beta in the portfolio 0.615 -0.1
Port Folio Beta 0.52
Expected Portfolio return 5.03%
The portfolio has been constructed taking 50% of the BGA stocks and 50% of the second
company. The portfolio beta has been computed taking the two beta multiplied by respective
weight. The expected rate of return is computed by applying the CAPM model considering the
portfolio beta, risk free rate and the risk premium.

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Answer to question 3: Risk and return analysis of the company:
Overview of the company:
Bega Cheese Limited is an Australian company dealing in dairy and associated
agricultural products. Bega Cheese limited is an Australian stock exchange listed company and
they are known for their special cheese. They are having a huge in house farm and a production
and packaging system to meet the customers’ needs with improved, innovative and quality
products. They have been performing well financially and operationally for the last couple of
years. Their shares are currently quoting at 4.90AUD in the Australian Stock Exchange
(begacheese.com.au 2019).
Financial Performance:
Bega Cheese Limited is performing financially well for the last couple of years. As can
be seen from their annual reports and financial performance parameters, they are having a long
term growth rate of 10.56 % in their sales. They are increasing their investment and production
with the increasing demand for their products in the domestic as well as international market, but
their overall growth rate in their stock price is negative as they are having a very low net mergin
for the last year. The company is having a 37.6 total debt to equity ratio, which is below the
industry average of 51.91. it implies the company is assuming lower risk to manage their capital
structure and to finance their long term capital needs, but still they are making a well tradeoff
between their debt and equity which resulted in a 48.05 % EPS growth rate for the company,
which is only 8.07 % for the industry (reuters.com 2019). Their key financial performance
parameters and ratios can be tabulated as under with comparative charts to compare their
performance with the industry averages.

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Chart showing fluctuation in the share price of BEGA Cheese
VALUATION RATIOS
Company Industry Sector
P/E Ratio (TTM) 7.42 22.27 40.49
P/E High - Last 5 Yrs. 53.23 36.54 41.37
P/E Low - Last 5 Yrs. 7.17 17.69 25.46

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P/E Ratio (TTM) P/E High - Last 5 Yrs. P/E Low - Last 5 Yrs.
0
10
20
30
40
50
60
Company
Industry
Sector
From the above ratios and graphs, it can be observed that, the company is performing
substantially in terms of price to earnings ratio. The price to earnings ratio implies the
relationship between the market price of the shares and the earnings price of the share. Their
figures are below the current and five years average of industry and the respective sector.
RISK COEFFICIENT
Company Industry Sector
Beta 1.23 0.93 0.69

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Company Industry Sector
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Beta
Beta
From the above graph, it can be seen that, the risk coefficient of the company is higher
than the industry and the sector average. The company is taking huge amount of debt in
financing their fixed assets. They need to make a tradeoff between the risk and return to achieve
the highest return to the shareholders.
DIVIDENDS
Company Industry Sector
Dividend Yield 1.49 2.32 2.22
Dividend Yield - 5 Year Avg 1.84 2.3 2.48
Dividend 5 Year Growth Rate 9 12.4 9.45

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Dividend Yield Dividend Yield - 5
Year Avg Dividend 5 Year
Growth Rate
0
2
4
6
8
10
12
14
DIVIDENDS Company
DIVIDENDS Industry
DIVIDENDS Sector
In terms of dividend payments and dividend growth, the company is performing
marginally well, in terms of growth in the dividend payment the company is performing almost
close to the industry.
DIVIDEND PAYOUT RATIO
Company Industry Sector
Payout Ratio(TTM) 12.17 25.19 58.62
Company Industry Sector
0
10
20
30
40
50
60
70
Payout Ratio(TTM)
Payout Ratio(TTM)

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GROWTH RATES
Company Industry Sector
Sales (MRQ) vs Qtr. 1 Yr. Ago -4.58 2.3 -0.89
Sales (TTM) vs TTM 1 Yr. Ago 2.57 6.68 5.26
Sales - 5 Yr. Growth Rate 5.63 8.98 10.71
Company Industry Sector
-6
-4
-2
0
2
4
6
8
10
12
Sales (MRQ) vs Qtr. 1 Yr.
Ago
Sales (TTM) vs TTM 1 Yr.
Ago
Sales - 5 Yr. Growth Rate
From the above graph it can be noticed that the company is having a negative sales MRQ
while the industry average was positive, though the sectors’ overall performance was also
negative.
GROWTH RATES
Company Industry Sector
EPS - 5 Yr. Growth Rate 48.05 8.07 8.17

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Company Industry Sector
0
10
20
30
40
50
60
EPS - 5 Yr. Growth Rate
EPS - 5 Yr. Growth Rate
In terms of growth in the sales, the company is performing tremendously. The company
is having a high growth rate in sales in the last five years. The company’s performance is over
the industry and the sector average.
FINANCIAL STRENGTH
Company Industry Sector
Quick Ratio (MRQ) 2.44 1.21 0.88
Current Ratio (MRQ) 3.07 1.59 1.51
LT Debt to Equity (MRQ) 37.59 27.45 7.7
Total Debt to Equity (MRQ) 37.6 51.91 18.85
Interest Coverage (TTM) 14.6 43.57 39.32

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Quick
Ratio
(MRQ)
Current
Ratio
(MRQ)
LT Debt to
Equity
(MRQ)
Total Debt
to Equity
(MRQ)
Interest
Coverage
(TTM)
0
10
20
30
40
50
60
FINANCIAL STRENGTH
Company
FINANCIAL STRENGTH
Industry
FINANCIAL STRENGTH
Sector
PROFITABILITY RATIOS
Company Industry Sector
Gross Margin (TTM) 12.57 30.7 38.82
Gross Margin - 5 Yr. Avg. 12.22 29 37.51
EBITD - 5 Yr. Avg 5.07 15.03 19.52
Operating Margin (TTM) 16.14 13.11 18.02
Operating Margin - 5 Yr. Avg. 6.83 12.06 17.73
Pre-Tax Margin (TTM) 16.14 12.26 18.12
Pre-Tax Margin - 5 Yr. Avg. 6.83 10.82 17.39
Net Profit Margin (TTM) 11.31 8.88 13.5
Net Profit Margin - 5 Yr. Avg. 4.84 7.72 12.88
Effective Tax Rate (TTM) 29.94 27.81 25.88
Effective Tax Rate - 5 Yr. Avg. 29.18 28.13 25.85

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Gross Margin (TTM)
Gross Margin - 5 Yr. Avg.
EBITD - 5 Yr. Avg
Operating Margin (TTM)
Operating Margin - 5 Yr. Avg.
Pre-Tax Margin (TTM)
Pre-Tax Margin - 5 Yr. Avg.
Net Profit Margin (TTM)
Net Profit Margin - 5 Yr. Avg.
Effective Tax Rate (TTM)
Effective Tax Rate - 5 Yr. Avg.
0
5
10
15
20
25
30
35
40
45
PROFITABILITY
RATIOS Company
PROFITABILITY
RATIOS Industry
PROFITABILITY
RATIOS Sector
In terms of profitability, the company’s performance is not satisfactory. In most of the
profitability parameters, their figures are much below the industry as well as the sector average.
It implies their inefficient operational management. They need to improve their operations and
operation management to earn higher profit from the existing facilities.
EFFICIENCY
Company Industry Sector
Receivable Turnover (TTM) 7.86 13.04 21.45
Inventory Turnover (TTM) 5.95 6.78 6.25
Asset Turnover (TTM) 1.49 0.89 1.76

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Receivable
Turnover (TTM) Inventory
Turnover (TTM) Asset Turnover
(TTM)
0
5
10
15
20
25
EFFICIENCY Company
EFFICIENCY Industry
EFFICIENCY Sector
MANAGEMENT EFFECTIVENESS
Company Industry Sector
Return on Assets (TTM) 16.89 7.94 24.69
Return on Assets - 5 Yr. Avg. 8.98 7.93 28.42
Return on Investment (TTM) 23.78 12.12 60.7
Return on Investment - 5 Yr. Avg. 13.36 11.72 62.71
Return on Equity (TTM) 30.82 15.47 72
Return on Equity - 5 Yr. Avg. 16.69 14.81 71.31

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Return on Assets (TTM)
Return on Assets - 5 Yr. Avg.
Return on Investment (TTM)
Return on Investment - 5 Yr. Avg.
Return on Equity (TTM)
Return on Equity - 5 Yr. Avg.
0
10
20
30
40
50
60
70
80
MANAGEMENT
EFFECTIVENESS Company
MANAGEMENT
EFFECTIVENESS Industry
MANAGEMENT
EFFECTIVENESS Sector
From the efficiency measures and the above graph, it can be observed that, the company
is having good remarks in terms of efficiency ratios. In terms of return on equity, their
performance is more than the industry average, and in many other efficiency parameters, they are
doing well.
Risk and Return measures of the company:
The ultimate objective of the financial leverage is to maximize the return to the
shareholders of the company. In achieving such objective, the company needs to manage their
funds and make an optimal combination of the debt and equity in the capital structure, which
trades off between the risk and return and yields a maximum return to the shareholders. From the
above analysis, it can be seen that the company is taking less debt finance as the company beta is
much higher than the industry and the sector average. They have successfully made a optimal
combination of debt and equity which resulted a good EPS and growth rate in EPS. In terms of

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efficiency they are performing far better and showed a high mark over the industry averages,
their current year’s net profit margin is also noticeably over the industry average (reuters.com
2019).
To achieve the risk and return trade off and to make a proper balance between the risk
and return, the company should use that much amount of debt in their capital structure, which
will help the company to reduce the overall cost of capital to the minimum level. If the overall
cost of capital can be reduced to the lowest possible level, then the return to the shareholder will
be highest.
Conclusion and recommendation:
Based on the above discussions and calculation, it can be concluded, a proper tradeoff
between risk and return can give a company the best result in terms of financial efficiency and
performance. Achieving that objective the Bega Cheese limited have also shown the good side of
their performance and have achieved a remarkable financial performance over the industry
average. Lastly, it can be recommended for the company to focus on their key success factors,
long term profitability and long term capital management to achieve a sustainable long term
growth.

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References and bibliography:
Barr, M.J. and McClellan, G.S., 2018. Budgets and financial management in higher education.
John Wiley & Sons.
begacheese.com.au (2019). Home - Bega Cheese. [online] Bega Cheese. Available at:
https://www.begacheese.com.au/ [Accessed 20 Apr. 2019].
Chen, H., Cummins, J.D., Viswanathan, K.S. and Weiss, M.A., 2014. Systemic risk and the
interconnectedness between banks and insurers: An econometric analysis. Journal of Risk and
Insurance, 81(3), pp.623-652.
Dewandaru, G., Bacha, O.I., Masih, A.M.M. and Masih, R., 2015. Risk-return characteristics of
Islamic equity indices: Multi-timescales analysis. Journal of Multinational Financial
Management, 29, pp.115-138.
Finkler, S.A., Smith, D.L. and Calabrese, T.D., 2018. Financial management for public, health,
and not-for-profit organizations. CQ Press.
Hicks, J.R., 2017. From ‘Value and Capital’. In Bond Duration and Immunization (pp. 57-61).
Routledge.
Lutz, F., 2017. The theory of interest. Routledge.
Muritala, T.A., 2018. An empirical analysis of capital structure on firms’ performance in
Nigeria. IJAME.
Renz, D.O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.

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reuters.com, R. (2019). ${Instrument_CompanyName} ${Instrument_Ric} Analysts |
Reuters.com. [online] U.S. Available at:
https://www.reuters.com/finance/stocks/analyst/BGA.AX [Accessed 20 Apr. 2019].
reuters.com, R. (2019). ${Instrument_CompanyName} ${Instrument_Ric} Chart| Reuters.com.
[online] U.S. Available at: https://www.reuters.com/finance/stocks/chart/BGA.AX [Accessed 20
Apr. 2019].
reuters.com, R. (2019). ${Instrument_CompanyName} ${Instrument_Ric} Financial Statement |
Reuters.com. [online] U.S. Available at: https://www.reuters.com/finance/stocks/income-
statement/BGA.AX [Accessed 20 Apr. 2019].
Shahzad, S.J.H., Ferrer, R., Ballester, L. and Umar, Z., 2017. Risk transmission between Islamic
and conventional stock markets: A return and volatility spillover analysis. International Review
of Financial Analysis, 52, pp.9-26.