This document provides study material and solved assignments for Financial Management. It covers topics such as time value of money, bond and share valuation, investment decision criteria, risk and return, and more.
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Running head:FINANCIAL MANAGEMENT Financial Management Name of the Student: Name of the University: Author’s Note: Course ID:
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1FINANCIAL MANAGEMENT Table of Contents Question One-Time Value of Money:.............................................................................................3 a) Drawing a time line depicting all of the Cash flows:..................................................................3 b) Indicating the amount that needs to be accumulated by Broadbent:...........................................3 c) Calculating the deposit amount of Broadbent for retirement annuity:........................................3 d) Indicating how much deposit is needed by Broadbent:...............................................................4 e) Indicating how much deposit is needed by Broadbent if Mr Sprod's retirement annuity was a perpetuity:........................................................................................................................................4 Question TWO-Bond and Share Valuation:....................................................................................5 a) Calculating the price of Bond A and Bond B:.............................................................................5 b) Calculating the annual coupon rate:............................................................................................5 ci) Calculating the firm’s expected dividend stream over the next 3 years:....................................6 cii) Calculating the firm’s current stock price:................................................................................6 ciii) Calculating the firm’s expected value in one year:..................................................................6 civ) Calculating expected dividend yield, capital gains yield and total return during the first year: .........................................................................................................................................................6 Question THREE-Investment Decision Criteria/Capital Budgeting:..............................................7 a) Calculating the Net Present Value and Internal Rate of Return:.................................................7 a) Discount rate 23%:......................................................................................................................7 b) Discount rate 18%:......................................................................................................................8 c) Discount rate 10%:......................................................................................................................9 Question FOUR Risk and Return:.................................................................................................10 a) Graphing the capital Allocation Line:.......................................................................................10
2FINANCIAL MANAGEMENT b) Indicating the fraction of investment in A, that will make the portfolio standard deviation to 12%:...............................................................................................................................................10 Bibliography:.................................................................................................................................12 Appendices:...................................................................................................................................13
2612132232 0 Cash inflow: Accumulation periodCash outflow: Distribution period 12 end of year deposits@9%20 end of year payments @12% 3FINANCIAL MANAGEMENT Question One-Time Value of Money: a) Drawing a time line depicting all of the Cash flows: b) Indicating the amount that needs to be accumulated by Broadbent: ParticularsValue PMT42,000 I12% n20 PV=PMT×1−(1+i)−n i=42,000×1−(1+12%)−20 12%=313,717 c) Calculating the deposit amount of Broadbent for retirement annuity: Particular sValue FV3,13,717 I9% n12
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4FINANCIAL MANAGEMENT PMT=FV×i (1+i)n−1=313,717×9% (1+9%)12−1=15,576.24 d) Indicating how much deposit is needed by Broadbent: Particular sValue FV3,13,717 I10% N12 PMT14,670.43 PMT=FV×i (1+i)n−1=313,717×10% (1+10%)12−1=14,670.43 e) Indicating how much deposit is needed by Broadbent if Mr Sprod's retirement annuity was a perpetuity: ParticularsValue PMT42,000 rate12% PV3,50,000.00 ParticularsValue FV3,50,000 rate9% time12 PMT17,377.73
5FINANCIAL MANAGEMENT Question TWO-Bond and Share Valuation: a) Calculating the price of Bond A and Bond B: FV40,000 Bond AAmountTimeRate Nothing is paid for first 6 years060.06 First payment2,000160.06 Second payment2,500120.06 PV ((2000/0.06)*(1-1/((1+0.06)^16))/((1+0.06)^12))+((2500/0.06)*(1-1/ ((1+0.06)^12))/((1+0.06)^(12+16)))+(40000/((1+0.06)^(6+16+12))) PV19,661.43 Bond BValue Rate6% Time40 FV40,000 Value40000/((1+6%)^40) Value3,888.89 b) Calculating the annual coupon rate: ParticularsValue Time5 Current price768 FV1000 YTD10% Coupon payment (((768*((1+10%)^4))-1000))/((((1+10%)^5)-1)/10%) Coupon payment38.80 Annual coupon rate(38.80*2)/1000 Annual coupon rate7.76%
6FINANCIAL MANAGEMENT ci) Calculating the firm’s expected dividend stream over the next 3 years: ParticularsValue Dividend2.00 Growth rate6% Dividend 1(2*(1+6%)) = 2.12 Dividend 2(2.12*(1+6%)) = 2.25 Dividend 3(2.25*(1+6%)) = 2.38 cii) Calculating the firm’s current stock price: ParticularsValue Dividend2.00 Growth rate6% Discount rate16% Current stock price(2*(1+6%))/(16%-6%) Current stock price21.2 ciii) Calculating the firm’s expected value in one year: ParticularsValue Current stock price21.2 Growth rate6% Expected value21.2*(1+6%) Expected value22.47 civ) Calculating expected dividend yield, capital gains yield and total return during the first year: ParticularsValue Current stock price21.2
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7FINANCIAL MANAGEMENT Growth rate6% Dividend2.00 Expected dividend yield(2*(1+6%))/21.2 Expected dividend yield10.00% Capital gains yield6% Total return during first year10%+6% Total return during first year16.00% Question THREE-Investment Decision Criteria/Capital Budgeting: a) Calculating the Net Present Value and Internal Rate of Return: a) Discount rate 23%: Projected Cash flowDis-rateDis-cash flow Year 0$-2,00,00,000.001.00-2,00,00,000.00 Year 1 $ 15,00,000.000.8112,19,512.20 Year 2 $ 32,78,000.000.6621,66,699.72 Year 3 $ 50,00,000.000.5426,86,919.59 Year 4 $ 64,50,000.000.4428,17,988.84 Year 5 $ 25,00,000.000.368,88,003.04 Year 6 $ 25,00,000.000.297,21,953.69 Year 7 $ 25,00,000.000.235,86,954.22 Year 8 $ 25,00,000.000.194,77,198.55 Year 9 $ 25,00,000.000.163,87,966.30 Year 10 $ 25,00,000.000.133,15,419.76 Year 11 $ 25,00,000.000.102,56,438.83
8FINANCIAL MANAGEMENT Year 12 $ 25,00,000.000.082,08,486.85 Year 13 $ 25,00,000.000.071,69,501.51 Year 14 $ 25,00,000.000.061,37,806.10 Year 15 $ 25,00,000.000.041,12,037.48 Year 16 $ 25,00,000.000.0491,087.38 Year 17 $ 25,00,000.000.0374,054.78 Year 18 $ 25,00,000.000.0260,207.14 Year 19 $ 25,00,000.000.0248,948.89 Year 20 $ 25,00,000.000.0239,795.85 NPV$-65,33,019.28 IRR14.29% No, the project will not be selected under the discount rate of 23%, as the NPV is negative. b) Discount rate 18%: Projected Cash flowDis-rateDis-cash flow Year 0$-2,00,00,000.001.00-2,00,00,000.00 Year 1 $ 15,00,000.000.8512,71,186.44 Year 2 $ 32,78,000.000.7223,54,208.56 Year 3 $ 50,00,000.000.6130,43,154.36 Year 4 $ 64,50,000.000.5233,26,838.24 Year 5 $ 25,00,000.000.4410,92,773.04 Year 6 $ 25,00,000.000.379,26,078.85
9FINANCIAL MANAGEMENT Year 7 $ 25,00,000.000.317,84,812.58 Year 8 $ 25,00,000.000.276,65,095.41 Year 9 $ 25,00,000.000.235,63,640.18 Year 10 $ 25,00,000.000.194,77,661.17 Year 11 $ 25,00,000.000.164,04,797.60 Year 12 $ 25,00,000.000.143,43,048.81 Year 13 $ 25,00,000.000.122,90,719.33 Year 14 $ 25,00,000.000.102,46,372.32 Year 15 $ 25,00,000.000.082,08,790.10 Year 16 $ 25,00,000.000.071,76,940.76 Year 17 $ 25,00,000.000.061,49,949.80 Year 18 $ 25,00,000.000.051,27,076.10 Year 19 $ 25,00,000.000.041,07,691.61 Year 20 $ 25,00,000.000.0491,264.08 NPV$-33,47,900.66 IRR14.29% No, the project will not be selected under the discount rate of 18%, as the NPV is negative. c) Discount rate 10%: Projected Cash flowDis-rateDis-cash flow Year 0$-2,00,00,000.001.00-2,00,00,000.00 Year 1$15,00,000.0013,63,636.36
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10FINANCIAL MANAGEMENT 0.91 Year 2$32,78,000.000.8327,09,090.91 Year 3$50,00,000.000.7537,56,574.00 Year 4$64,50,000.000.6844,05,436.79 Year 5$25,00,000.000.6215,52,303.31 Year 6$25,00,000.000.5614,11,184.83 Year 7$25,00,000.000.5112,82,895.30 Year 8$25,00,000.000.4711,66,268.45 Year 9$25,00,000.000.4210,60,244.05 Year 10$25,00,000.000.399,63,858.22 Year 11$25,00,000.000.358,76,234.75 Year 12$25,00,000.000.327,96,577.04 Year 13$25,00,000.000.297,24,160.95 Year 14$25,00,000.000.266,58,328.14 Year 15$25,00,000.000.245,98,480.12 Year 16$25,00,000.000.225,44,072.84 Year 17$25,00,000.000.204,94,611.67 Year 18$25,00,000.000.184,49,646.97 Year 19$25,00,000.000.164,08,769.98 Year 20$25,00,000.000.153,71,609.07 NPV$55,93,983.75 IRR14.29% The project will be selected under the discount rate of 10%, as the NPV is positive.
11FINANCIAL MANAGEMENT Question FOUR Risk and Return: a) Graphing the capital Allocation Line: 00.050.10.150.20.25 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% CAL Line b) Indicating the fraction of investment in A, that will make the portfolio standard deviation to 12%: No of sharesShare priceErStdvCorrRfWeight DREXLA1000618%22%0.68%20.00% OGATO4000414%20%0.68%80.00% 5000100.00% Portfolio Er(18%*20%) + (14%*80%) Portfolio Er14.800% Portfolio Var (((20%^2)*(22%^2)) + ((80%^2)*(20%^2)) + (2*20%*80%*0.6*22%*20%)) Portfolio Var3.60% Portfolio Stdv√3.60% Portfolio Stdv18.97%
12FINANCIAL MANAGEMENT The portfolio standard deviation cannot be reduced to the level of 12%, as both the stocks standard deviation is higher than 12%. Hence, the portfolio standard deviation value of 12% is not achievable.
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13FINANCIAL MANAGEMENT Bibliography: Finkler, S. A., Smith, D. L., & Calabrese, T. D. (2018).Financial management for public, health, and not-for-profit organizations. CQ Press. Renz, D. O. (2016).The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.
14FINANCIAL MANAGEMENT Appendices: Initial capit$20,000,000.00Initial capital$20,000,000.00Initial capital Discount r23%Discount rate18%Discount rate Projected CashflowDis-rateDis-cashflowProjected CashflowDis-rateDis-cashflow Year 0$-20,000,000.001.00-20,000,000.00Year 0$-20,000,000.001.00-20,000,000.00Year 0 Year 1$1,500,000.000.811,219,512.20Year 1$1,500,000.000.851,271,186.44Year 1 Year 2$3,278,000.000.662,166,699.72Year 2$3,278,000.000.722,354,208.56Year 2 Year 3$5,000,000.000.542,686,919.59Year 3$5,000,000.000.613,043,154.36Year 3 Year 4$6,450,000.000.442,817,988.84Year 4$6,450,000.000.523,326,838.24Year 4 Year 5$2,500,000.000.36888,003.04Year 5$2,500,000.000.441,092,773.04Year 5 Year 6$2,500,000.000.29721,953.69Year 6$2,500,000.000.37926,078.85Year 6 Year 7$2,500,000.000.23586,954.22Year 7$2,500,000.000.31784,812.58Year 7 Year 8$2,500,000.000.19477,198.55Year 8$2,500,000.000.27665,095.41Year 8 Year 9$2,500,000.000.16387,966.30Year 9$2,500,000.000.23563,640.18Year 9 Year 10$2,500,000.000.13315,419.76Year 10$2,500,000.000.19477,661.17Year 10 Year 11$2,500,000.000.10256,438.83Year 11$2,500,000.000.16404,797.60Year 11 Year 12$2,500,000.000.08208,486.85Year 12$2,500,000.000.14343,048.81Year 12 Year 13$2,500,000.000.07169,501.51Year 13$2,500,000.000.12290,719.33Year 13 Year 14$2,500,000.000.06137,806.10Year 14$2,500,000.000.10246,372.32Year 14 Year 15$2,500,000.000.04112,037.48Year 15$2,500,000.000.08208,790.10Year 15 Year 16$2,500,000.000.0491,087.38Year 16$2,500,000.000.07176,940.76Year 16