Finance For Business Assignment Report

Running head: FINANCE FOR BUSINESS
Finance for Business
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................4
Section 1......................................................................................................................................4
Information Regarding Key Financial Products..........................................................................4
Five Basic Principle of Finance...................................................................................................8
Section 2..........................................................................................................................................9
Part 1............................................................................................................................................9
Evaluation of Bond Market of Australia.....................................................................................9
Bond Rating Services in Australia.............................................................................................10
Distinction Between Government Bonds and Australian Corporate Bonds..............................10
Relation between YTM and Coupon Rate.................................................................................10
Interest rate Risks and Impact on Bond Prices..........................................................................11
Part 2..........................................................................................................................................11
Analysis of Listed Stock in Australia and the Trading process of such Stocks........................11
Market Capitalization and Computation of the Market Capitalization.....................................11
Oldest Shares Estimate and Determination of How it is Computed..........................................12
Three Years Historical Movements for the Index.....................................................................12
Analysis of Trends of Index......................................................................................................12
Section 3........................................................................................................................................13

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NPV and Sensitivity..................................................................................................................13
NPV Breakeven Analysis..........................................................................................................15
Conclusion.....................................................................................................................................15
Reference.......................................................................................................................................17

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Introduction
The main purpose of the assessment is to analyze the financial markets and three different
types of stocks which is present in Australian Market. The analysis would be considering all the
risks, returns and different aspects of the stock and therefore would also be including comparison
between all the stocks. The assessment would also be including details regarding the five basic
principles of principles and for the purpose of this analysis, a real-life event would be used for
instance. The assessment would also be including information regarding the Australian Bond
Market including information regarding different types of bonds which is floated in the market
including their features (Bianchini et al. 2016). The assessment would also be including
computation of NPV and Sensitivity analysis in relation to a stock. The analysis would be
primarily focusing on performance of different stocks in the Australia Market. The analysis
would be also including identification of Market capitalization of a company. The computation
would also be including breakeven analysis which would be done apply trial and error method so
that the most accurate results is available for the purpose of analysis (Booth and Choudhary
2013). The analysis would also be including estimation of the oldest index which operates in
Australia and for the same purpose an appropriate graph would also be presented in the
assessment.
Discussion
Section 1
Information Regarding Key Financial Products
The three financial products which are popularly traded in the Australia Stock Market are
common stocks, bonds and Preferred Stocks. In order to make effective comparison between the
three types of products, a table is appropriately presented below:

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Basis of Comparison Common Stock Bonds Preferred stocks
Ownership status The investors have
full ownership in
such a case
The bonds do not
have a case of full
ownership
In the case of
Preferred stocks as
well full ownership
is not present.
Risks The level of risks
in such an option is
quite high
The level of risks in
such a case is low
In the case of
preferred stocks, the
risks can be said to
be mediocre.
Source of Income In this case,
dividend is the
source of income
In the case of bonds,
interest payments
and coupon
payments are options
for revenue.
In the case of
Preferred stocks,
dividend income is
the only option.
Voting right The owner in this
case has voting
rights
There are no voting
rights available in
this case
No voting rights
available for
preferred stock as
well.
Maturity No Yes Yes
The table appropriately shows different features which are available for the financial
products which floats in Australian Markets. All the potential investors of the country consider
such aspects as well as the level of returns which is generated by a stock for taking decision
whether to make investments or not for the product. On an individual level, the three financial
products which are common in Australian Market are explained below with features and a real
life example.
Common Stock of Megaport Ltd
Particulars Common Stock
First issuance 21-Dec-2015
Offer price 1.25
Shares offered 20.0 Million
Raised capital 25.0 Million
Trading market Australian Securities Exchange
Market capitalization $1.4 Billion
Market price 10.60

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The above chart shows movements in share price of the business along with relevant
details which are associated with the stock which I being considered. The chart above shows the
level of fluctuation in the stock prices which makes the use of stocks from an investment point of
view significantly in attractive. In an overall analysis, it can be said that the level of risks which
increases their risk exposure by adopting common stock in their portfolio
(Au.finance.yahoo.com. 2020). The analysis which is shown above reflects analysis for the
business for a period of 5 years which is accurate for estimating the risks and returns which are
associated with the stock.
Bonds:
Particulars Bond (Euro Bond)
First issuance 20 April 2015
Offer price $100
Trading market Australian Securities Exchange
Trading volume 111,960
Market capitalization 600 Million

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Coupon rate 5.625%
Payment frequency 1
Market price 112.970
The information of Euro Bond is appropriately presented in the figure above which was
first issued in 2015. The chart represents movement in the bond prices and shows all the
fluctuations for the period of 3 years. The fluctuations in the prices of the bond is not that
extreme as compared to that of ordinary shares of a business (Asx.com.au. 2020). Therefore, it
can be said that making investments in shares is a much better option in comparison to other
options of making investments.
Preferred stocks:
Particulars Preferred stocks (MBLPA)
First issuance 8th Oct 2014
Offer price 100
Trading market Australian Securities Exchange
Trading volume 3,850

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Yield 4.69%
Market price 101.27
The above information shows the preference share capital and other preferred stocks
which is issued by the company. This is a type of option which is often used by investors for the
purpose of managing the risks which are associated with the business (Asx.com.au. 2010). The
graph above shows an increasing trend for the stock which is a positive sign and the investors
can make investments in the same so that they can generate appropriate returns from the
operations of the business. It is to be noted that the element of risks in this case is significantly
lower than common equity shares which is issued by the business.
Five Basic Principle of Finance
The five-basic principle of finance are related to use of such principles in analyzing a particular
investment option. The five-basic principle of finance is appropriately shown in the discussion
below:
 Cash Flow is What Matters: In case of making an investment in the stocks of a business,
the cash flow element is of major consequence and the same is considered by investors

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before they undertake any investments. The cash flow from the equity or investment is all
that matters and the same reveals information regarding future growth and investments.
The IPO in Australia mainly considers the basis of valuation which is based on the cash
flows of a business (Cucchiella, D’Adamo and Gastaldi 2015). Therefore, it can be said
that the valuation for the shares is determined with the help of cash flows and also depicts
the ability of the business to raise funds from the market.
 Money Has a Time Value: The time value factor for money is often considered in
analysis for deciding whether investment is to be undertaken or not. The time value of
money is a portray of the inflationary costs of capital which can be used by the investors
to take decisions whether or whether not to make investment in a business (Marchioni
and Magni 2018). Most of the companies which are listed in the Australian stock
exchange uses the information of time value of money for undertaking investments which
can bear profits for the business in long run. Risk Requires a Reward: One of the most common principle which is to be considered is
the relation between risks and rewards for a business. In most of the cases, CAPM model
is utilized by the management of a company for checking the risks factors and also
considering the returns which would help in the decision whether the investment is viable
or not. Examples can be given of Apple and Webjet Ltd where if the investors take more
risks then they are awarded with higher returns. Therefore, it can be said that the risks
and return factor plays a vital role in taking decisions whether to make investments or
not. Market Prices Are Generally Right: In addition to the above mention elements, the
market events are also important factor which has an impact on the overall investments

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for any company. The news which floats regarding IPO affects the entire stock flow over
a period of time. There have been cases where companies have also cancelled their IPO
offers to the public considering a negative trend in the market. The overall news which is
present in the market greatly impacts the choices which is made by the company as well
as the choices which are made by investors of a business. Conflicts of Interest Cause Agency Problems: There are certain problems which are
associated with agency problems which could impact the operations of a business. The
conflict is mainly detected in case when a scandal takes place which significantly impacts
the operations and investment function of the business (Le and Chang 2015). An instance
can be given of AMP ltd which lost most of its investors due to a scandal which was
committed by the senior executives of the company.
Section 2
Part 1
Evaluation of Bond Market of Australia
The bond is traded in the Australian Securities Exchange which is considered to be the
largest market for such kind of trading in the country. Some of the common bonds which are
traded in the market are government bonds, corporate bonds and other kinds of bonds. Therefore,
it can be said that different kinds of bonds are circulated in the secondary market. The use of
bonds in the secondary market is appropriately traded to ensure that the business is able to collect
the required funds from the market.
Bond Rating Services in Australia
The bonds which are floated in the market are often rated using Standard & Poor’s credit
rating, Moody’s credit rating, Fitch’s credit rating and DBRS’s credit rating considering the

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nature of bonds which is being considered. The rating which are given to a bond are extremely
useful for the purpose of detecting the risks and return relation which may be associated with an
investment. Therefore, it can be said that the credit rating agencies plays a vital role in the
trading functions for the bonds which are circulated in the Australian Market.
Distinction Between Government Bonds and Australian Corporate Bonds
The main points of distinction which can be identified are listed below in detail
considering governmental bonds and corporate bonds which are circulated in Australia:
 In case of Australian Government bonds, the government provides the guarantee
regarding the payments and returns which are associated with the bond. The business and
firms provide guarantee for corporate bonds.
 The returns in case of corporate bonds are not fixed and rather fluctuating while in the
case of Government bonds, the returns are fixed in the form of coupon payments.
 Corporate Bonds are measured in terms of credit ratings considering their respective
financial performance of the company while ratings in case of governmental bonds are
provided based on fiscal deficit of the country and the policies which are set by the
government.
Relation between YTM and Coupon Rate
The YTM of a bond is directly related to the coupon rate of a bond as both these
estimates are considered by the investor for determining the actual price for the bond. Besides
this, the formula of YTM incorporates current coupon rate, face value and market value so that
the computation which is done is accurate. Therefore, it can be said that there is a direct relation
between coupon rate and YTM which is computed for a bond. If the coupon rate for a bond is
higher than the YTM of the bond than the overall demand for the same in the market would also

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be the case and opposite is also possible.
Interest rate Risks and Impact on Bond Prices
The interest rate is one of the most important factor which is considered for determining
the value of the bond and the same is also an indicator for the overall interest rate conditions in
the market. If the interest rate is higher than the coupon rates of a bond than naturally the
demand for the bond would be impacted and the opposite is also possible considering the bond
market.
Part 2
Analysis of Listed Stock in Australia and the Trading process of such Stocks
The main stock market which is functional in Australia is Australian Securities Exchange
where different companies which are listed often enlist their stocks for the purpose of valuing the
same in the market. As per the current market situation, there are almost 2,258 stocks of different
companies listed in the market and the same are also freely traded in the market. The companies
who have the desire to issue new stocks in the market can do so by initiating an IPO which
provides options to the investors. On the basis of viability of the stock options, the investors take
decisions whether or whether not to make investments in a stock.
Market Capitalization and Computation of the Market Capitalization
The analysis of market capitalization is done for the benefit of the shareholders and also
for ensuring that the level of risks which is associated with the stock can be properly valued for
the business. The market capitalisation rate is used for the determination of current values for the
business in the capital market.
Oldest Shares Estimate and Determination of How it is Computed
The oldest shares index in Australia which can be identified is ALL-Ordinary Index

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which was set up in January 1980. The index is used for the measure of different company’s
stock prices and the same mainly comprises of 500 largest companies considering the market
capitalization rate for the business. It is to be noted that the same is also useful for depicting the
market conditions which is present in Australia. The ALL-Ordinary Index is also used for the
purpose of making comparisons which is used significantly for analysis with other companies.
Three Years Historical Movements for the Index
Analysis of Trends of Index
The ALL-Ordinary Index chart which is prepared by the business is formulated for the
purpose of detecting the Australian Marketing Trends and the same comprises of the largest
capital market stocks. The ALL-Ordinary Index shows that there has significant increment over
time which shows that there has been significant improvement in this respect. There was a sharp
decline in the ALL-Ordinary Index which resulted in the fall of the estimates and the same

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became volatile. However, it is from the beginning of 2017 that there has been significant
increase in the ALL-Ordinary Index which reflects that the attributes of the Australian Markets
are quite positive. However, in 2018, there was again a decline in the index which affects the
operations of the business.
Section 3
NPV and Sensitivity
Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Sales for the
year 400,000 400,000 400,000 400,000
Unit price 22 22 22 22
Per unit cost (12) (12) (12) (12)
Sales 8,800,000 8,800,000 8,800,000 8,800,000
VC (4,800,000) (4,800,000) (4,800,000) (4,800,000)
Total Fixed
cost (250,000) (250,000) (250,000) (250,000)
Dep of
equipment (550,000) (550,000) (550,000) (550,000)
EBIT 3,200,000 3,200,000 3,200,000 3,200,000
Tax@30% (960,000) (960,000) (960,000) (960,000)
Net income 2,240,000 2,240,000 2,240,000 2,240,000
Cash flow 2,790,000 2,790,000 2,790,000 2,790,000
Initial cost (2,450,000)
Residual
value 250,000
WC (500,000) 500,000
Total Cash
flow (2,950,000) 2,790,000 2,790,000 2,790,000 3,540,000
NPV 6,406,185

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The computation which is shown above reflects the NPV of the project and the potential
of the project to generate appropriate returns from operations of the business. The NPV for the
project is demonstrated to be positive which reflect that the project would be profitable in the
long run. The computation is done so that viability of the project can be established.
Sensitivity Analysis
Decrease in Numner of units 10.00%
Decrease in Price per unit 10.00%
Increases in Variable cost 10.00%
Increases in Cash fixed cost 10.00%
Decrease in Numner of units 6,406,185
400,000 6,406,185
360,000 5,518,622
Decrease in Price per unit 6,406,185
22.00 6,406,184.69
19.80 4,453,547.57
Increases in Variable cost 6,406,185
(12.0) 6,406,184.7
(13.2) 5,341,109.9
Increases in Cash fixed cost 6,406,185
(250,000) 6,406,185
(275,000) 6,350,712
The sensitivity analysis computations is shown in the above table and the same reflects
different scenarios and how the same can have an impact on the overall analysis of the financial
situation of the business (Borgonovo and Plischke 2016). There is a slight decline in NPV for the
business reflecting changes and the same is not a positive aspect and therefore the management
of the company need to consider the same before undertaking any investments.

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NPV Breakeven Analysis
Particulars Value
Unit price 20
Per unit cost (12)
Contribution percentage 39%
Total fixed cost 250,000
Break-even units 32,051
The values which is presented in the above table represents the breakeven analysis for the
business. The analysis shows the minimum level of product sales which needs to be achieved by
the management of the company in order to cover the costs of the business (Gálvez and Capuz-
Rizo 2016). The computation shows the break-even units to be 32051 units for the business
which if achieved by the business would allow the management to cover the costs of the
business. It is to be noted that breakeven analysis is very useful for taking major decisions
regarding the operations of the business.
Conclusion
The analysis which is shown above reflects the situation which is present in the
Australian Stock market considering ordinary shares, bonds, preferred stocks. The analysis also
shows the different features of bond market and stock market which actively helps in decision
making process for an investor. The analysis also cites examples of bonds, common shares and
preferred stocks which are floating in Australia and also demonstrates graphical presentation
associated with the same. The assessment identifies the Australian Stock Exchange to be the
largest stock exchange which is operating in the country while the oldest stock exchange is
identified to be ALL Ordinary Index. The different financial products which are traded in the
ASX is also analysed in the assessment. Furthermore, the discussion also includes computation
of NPV of a project for the purpose of taking investment decisions associated with the same. In

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addition to this, sensitivity analysis is also applied to the project so that different scenarios can be
uncovered.

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Reference
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