Finance: TVM and Bond Valuation, Risk and Return Estimates, Risk and Return Analysis of a Company
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This document provides answers to questions related to TVM and bond valuation, risk and return estimates, and risk and return analysis of a company in the field of finance.
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Running head: FINANCE Finance Name of the Student: Name of the University: Author’s note:
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1FINANCE 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:..............................................................................10 Conclusion and recommendation:.............................................................................................10 References and bibliography:........................................................................................................11
2FINANCE
3FINANCE Answer to question 1: TVM and Bond valuation Sub part (a): Computation of Discounted value of the instalments Monthly Instalment Amount$29,100 Number of years4 Number of Payment per year12 Annual Discount rate7% Discounted Value of the instalment$ 12,15,222 To compute the discounted 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 is to be the discounted value of the installment, which the bank will give to the company. Sub part (b): Computation of Expected Revenue in 5 years with a 6.6% growth rate Annual Operating Revenue$ 57,31,100 Annual growth rate6.60% Number of Years5 Expected annual revenue in 5 years$ 78,89,037 The Annual sales are compounded with the annual growth rate to arrive at the expected sales at the fifth year. Sub part (c): Computation of Effective Annual Interest Rates for the following loans Loan ALoan BLoan C Loan Amount4.93%5%4.91% Compounding termsMonthlySemi-annuallyDaily Compounding period in a year122365
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4FINANCE Effective annual interest rate (EAR)5.04%5.06%5.03% In computing the effective interest rate of the loan option C, 365 days in a year has been considered. It can be observed from the above table that, the effective interests for all the three loan options are more or less same. Sub part (d): Computation of Instalment amount for the purchase of property Value of the property$5,74,000 Annual Interest rate3.80% Number of years10 Number of payments per year4 Quarterly Instalment Amount$17,316 To compute the amount of installment per quarter, the annual interest rate is converted into quarterly interest rate by dividing the annual interest rate by four. Then, considering the present value of the loan as the full value of the property the installment amount can be computed by the compounding techniques as $17,316 per quarter. Sub part (e): Computation of Yield to maturity of the bond Par value of the bond100 Years till maturity8 Annual coupon rate7.05% Current price109.5 Yield to maturity5.55% 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
5FINANCE 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. Sub part (f): Computation of Coupon payment for a required rate of return Par value of the bond$1,000 Years till maturity6 Number of payments per year2 Annual coupon rate7.00% Required rate of return5.10% Current price$859 Coupon payment$52 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. Answer to question 2: Risk and return estimates Sub part (a): Computation of Expected rate of return Under CAPM model ParticularsBLDHypothetical Company Risk free rate1.95%1.95% Market risk premium6%6% Risk coefficient (Beta)1.31-0.2 Expected return9.81%0.75% In computing the expected rate of return, the risk free rate has been considered as the yield to maturity of the 10 years Australian Government bond.
6FINANCE Sub part (b): Computation of portfolio beta and expected return Percentage of shares in the portfolio50%50% Expected Return9.81%0.75% Beta of the company1.31-0.2 Weightage of beta in the portfolio0.655-0.1 Port Folio Beta0.56 Expected Portfolio return5.28% Answer to question 3: Risk and return analysis of the company: Overview of the company: BoralLimitedisaAustraliabasedconstructioncompanydealinginconstruction materials and various other construction services. They mainly supplies construction materials such as asphalt, ash, blocks, bricks, cement, additives and concretes. The company has been a well established and well performing company since last couple of years (boral.com 2019). Financial Performance: For the last three years there, growth rate in sales has been decreasing, it was averagely 38.83 % and now it has come to 6.60% only. Subsequently there is a decreasing growth rate in their profit margin. But on the efficiency side of the company they are showing a good mark in their financial performance. Their current return on assets is 4.40 while a 5 years average is 3.58. Their current return on investment is 4.98 against their 5 years average of 4.32, but as compared to the industry performance they are not doing well. The industry average return on assets is 4.76 and the return on investment is 5.94 (reuters.com 2019).
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7FINANCE They are having a quick ratio of 1.11 which is above the standard and it implies their short term solvency, on the other hand their current ratio is not satisfactory. They are having a total debt to equity ratio of 40.07, which implies the company is a highly leveraged company using huge amount of debt capital to finance their long term assets. Though the company is adding huge amount of debt capital in their capital structure they are still unable to utilize the leverage benefits, their price earnings ratio is still below the industry average (reuters.com 2019). Their key financial performance measures have been tabulated as under with a comparison to the industry average. VALUATION RATIOS CompanyIndustrySector P/E Ratio (TTM)14.0545.6235.81 P/E High - Last 5 Yrs.39.9949.48130.09 P/E Low - Last 5 Yrs.18.9613.8314.7 P/E Ratio (TTM)P/E High - Last 5 Yrs.P/E Low - Last 5 Yrs. 0 20 40 60 80 100 120 140 Company Industry Sector RISK COEFFICIENT CompanyIndustrySector Beta1.251.581.3
12FINANCE 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 2 4 6 8 10 12 14 MANAGEMENT EFFECTIVENESS Company MANAGEMENT EFFECTIVENESS Industry MANAGEMENT EFFECTIVENESS Sector Risk and Return measures of the company: Their shares are currently quoting at 4.87AUD and having a slight growth in the price (reuters.com 2019). As can be observed from the above tables and analysis that, the company is having huge amount of debt financing for their company which might have resulted in a maximum return to the shareholders, but it can be observed that despite having a significant risk coefficient, their expected return is not so satisfactory. Their performance in most of the parameter is below the industry standards. The industry average risk is higher than the company risk coefficient, but still at that level of risk their expected rate of return is much higher than their actual rate of return. Conclusion and recommendation: From the above analysis and discussion it can be concluded, that the company is assuming a lower risk burden, which resulted into a lower return than the industry average and it is recommended that, to improve their actual profitability and return, they need to assume more risk and manage the debt fund more efficiently.
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13FINANCE References and bibliography: Barr, M.J. and McClellan, G.S., 2018.Budgets and financial management in higher education. John Wiley & Sons. boral.com(2019).ShareholderInformation.[online]Boral.Availableat: https://www.boral.com/shareholder-information [Accessed 19 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 Islamicequityindices:Multi-timescalesanalysis.JournalofMultinationalFinancial 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’. InBond 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.
14FINANCE reuters.com, R. (2019).${Instrument_CompanyName} ${Instrument_Ric} Financial Statement | Reuters.com.[online]U.S.Availableat:https://www.reuters.com/finance/stocks/income- statement/BLD.AX [Accessed 19 Apr. 2019]. Shahzad, S.J.H., Ferrer, R., Ballester, L. and Umar, Z., 2017. Risk transmission between Islamic and conventional stock markets: A return and volatility spillover analysis.International Review of Financial Analysis,52, pp.9-26. U.S.(2019).${Instrument_CompanyName}${Instrument_Ric}Financials|Reuters.com. [online]Availableat:https://www.reuters.com/finance/stocks/financial-highlights/BLD.AX [Accessed 19 Apr. 2019].