This document provides information on financial management, including topics such as investment calculations, bond valuation, dividend analysis, and project evaluation. It also includes portfolio analysis and the concept of time value of money.
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Running head: FINANCIAL MANAGEMENT Financial Management Name of the Student: Name of the University: Author’s Note:
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2FINANCIAL MANAGEMENT Question 1 a) The amount that will be invested by the Broadbent Group will be for a sum of 12 year where a annual amount of $15,576 will be invested by the company. The company will be earning a nominal interest rate on the same which is around 9% the same will help in compounding the money and grow the money at the rate of 9% for a sum of 12-years.At the end of 12 year the total value of the fund will be somewhat around $313,717and the same will be used for paying out the $42,000 annuity for a sum of 20 years. 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 -20000 -10000 0 10000 20000 30000 40000 50000 Trend Line of the Cash Flows b) The Broadbent Group must accumulate around $313,717and the same will be used for paying out the $42,000 annuity for a sum of 20 years.The calculation for the same was done by discounting the annuity amount as follows: Value at the end of Year 12 = 42,000/(1+0.12)^1……….42,0000/(1+0.12)^20. The final value was determined with the help of the discounting the annuity amount by the discount rate and then summing the same which came to around $ 42,000. c) The annual amount that will be required by the Broadbent Group would be around $15,576 and the same will be the annual amount which will be deposited.The value at the end of 12
3FINANCIAL MANAGEMENT year which is around $313717 will be paid by the Broadbent Group by taking the appropriate discount rate of 95 that the company will be earning and the formula that was applied was the PMT formula in the excel function where: PMT= (Future Value = 313717), (N=12 Years), (Discount Rate= 9%), (Present Value = 0). d) If the Broadbent Group could earn around 10% rather than 9% than the deposit able amount on an annual basis would be reduced to around $14,670 instead of $15,576.The same method will be applied for analysing the different situation where in the investment fund the company will be earning a sum of 10% instead of the 9% earlier on the funds. The formula for the same then will be as follows: PMT= (Future Value = 313717), (N=12 Years), (Discount Rate= 10%), (Present Value = 0). e) If the payment that would be on a annuity basis than a sum of $17,378 would be deposited by the company whereby in the investment stage the company will be earning around 12% and then paying out $42,000 on an perpetuity basis.The formula applied for calculating the value of the fund at the end of the 12-years would be as follows: Present Value of Perpetuity = Annuity Amount/ Discount Rate Present Value of Perpetuity = $42,000/0.12 Present Value of Perpetuity= $350,000 Particulars Time PeriodYear 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Year 11Year 12 Cash Flows Present Value in Year 12 @ 12%$3,50,000 Annual Deposits @ 9%$17,378$17,378$17,378$17,378$17,378$17,378$17,378$17,378$17,378$17,378$17,378$17,378 Present Value of the Amt to be Paid($1,24,437) Funding Phase Retirement Payment Analysis Perpetuity Basis
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4FINANCIAL MANAGEMENT Question 2 a) The current price of the bond was determined to be around $9893.74 and the price for Bond B to be around $3,889.89. While valuing the Bond A all the coupon payment arising from the same on a semi-annual basis and the relevant required rate of return or discount rate was taken for discounting the cash flows. b) The coupon rate of the bond is around 4% and the same was determined by taking the following terms: Present Value-768 Face Value1000 Annual Rate of Return10% Number of Years5 Annual Coupon Rate (PMT)$19.95 Coupon Rate4% The coupon rate that was determined for the bond was 4% and the same has been calculated with the help of the Coupon Amount/ Face Value of Bond. =$19.95/1000 Coupon Rate = 4%. c) i) The expected dividend for the firm would be by taking the base dividend of $2.00 and the applicable growth rates for the following year as: ï‚·2*1.06 = 2.12 (Year 1) ï‚·2.12*1.06 = 2.25 (Year 2) ï‚·2.25*1.06 = 2.38 (Year 3)
5FINANCIAL MANAGEMENT Dividend (Do)2 Growth Rate6% Dividend (D1)2.12 Dividend (D2)2.25 Dividend (D3)2.38 ii) The current stock price of the firm is around $20 which is calculated byDo/Required Return that is 2/0.16 = $20. The current dividend rate given by the company that is the $2 will be taken as Dividend paid today (Do) and the discount rate for the firm to be around 0.16. iii) The expected value of the firm in one year would be calculated with help of dividend discount model that is D1/Re-g =2.12/(.16-0.06) =$21.2 iv) The expected dividend yield would be around $2/$20 that is dividend (Do)/ Current Share Price and the same was calculated to be 10%. The capital gain yield would be around 6% calculated as follows: Capital Gain Yield Original Price20 Current Price21.2 Change1.2 Capital Gain Yield (%) 6.00 % The total return for the firm was calculated by formula:Total Return (Dividend + Capital Gain Yield) = 10%+6% = 16%.
6FINANCIAL MANAGEMENT Question 3 a) The net present value of the project was calculated to be -$6533019 and the same was calculated by taking the discount rate of 23%. The IRR of the project was calculated to be 14.29%. b)The net present value of the project with 18% discount rate was calculated to be - $2,837,204. c) The net present value of the project with 10% discount rate was calculated to be $ 5,085,440 and the project would be accepted as the return generated by the project is higher than the required rate of return. Question 4 a) Capital Allocation Line 18%19%20%21%22%23% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00% Capital Allocati on Line Risk Return R(F) b) Portfolio Analysis
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7FINANCIAL MANAGEMENT Column1Column2Column3Column4Column5 Portfolio A DREXLAOGATO Share Price6.00$Share Price4.00$ No of Shares1000No of Shares4000 Expected Return18%Expected Return14% Standard Deviation22%Standard Deviation20% Market Value6000Market Value16000 Weight(%)27%Weight(%)73% Correlation0.6Covariance0.0264 Risk Free Rate8% Return (Re) =Weight of A * Return of A+ Weight of B* Return of B Return (Re) =15.09% Portfolio S.D3.52% Portfolio S.D19% Risk Free Rate8% Standard Deviation0%
8FINANCIAL MANAGEMENT Bibliography Chan, K., & Rate, E. A. I. (2018). & 6 The Time Value of Money.Financial Management. Muda, I., & Hasibuan, A. N. (2018). Public Discovery of the Concept of Time Value of Money with Economic Value of Time. InProceedings of MICoMS 2017(pp. 251- 257). Emerald Publishing Limited. Tyler, B. D. (2017). Using the Time Value of Money Decision Tree to calculate an athlete's.