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

Running head: FINANCE
Finance
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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%