Financial Management | Meaning, Objectives and Functions
Added on 2021-01-03
11 Pages2283 Words68 Views
FINANCIALMANAGEMENT
Table of ContentsQUESTION 1: TIME VALUE OF MONEY..................................................................................1a) Time Line depicting Cash-flows with Broadbent's Retirement Annuity...........................1b) Present Value of Annuity (PVA).......................................................................................1c) Annual deposits made during the accumulation period.....................................................1d) Calculating periodic payments, if rate of interest become 10%........................................2e) Calculating periodic payments if retirement annuity is a perpetuity.................................2QUESTION 2: BOND AND SHARE VALUATION.....................................................................3A) Current Price of Bond A and B.........................................................................................3B) Annual Coupon Rate Offered............................................................................................4C) Buildcorp Commercial PTY Ltd.......................................................................................4QUESTION 3: CAPITAL BUDGETING.......................................................................................5QUESTION 4: RISK AND RETURN.............................................................................................6a) Plotting CAL derived from Risk-Free Asset and Portfolio A............................................6b) Fraction of portfolio to be invested in A to have a portfolio standard deviation of 12%. .7REFERENCES................................................................................................................................8
QUESTION 1: TIME VALUE OF MONEYa) Time Line depicting Cash-flows with Broadbent's Retirement AnnuityAccumulation Period: Year 1 to Year 12 (12 years)1 2 3 4 5 6 7 8 9 10 11 12Distribution Period: Year 13 to Year 32 (20 years)13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 b) Present Value of Annuity (PVA)Periodic Payments beyond year 12 = $42,000 per annum = PInterest Rate at which such payments are made = 20% p.a. = rNumber of years such cash-outflows are incurred = 20 years = nPresent Value at the end of year 12 = P*[(1-(1+r)-n)/(r)]PVA = $42,000*[(1-(1+0.20)-20)/(0.20)] = $42,000*[(1-(1.20)-20)/(0.20)] = $42,000*[(1-0.026)/0.20] = $42,000*[0.974/0.20] =$42,000*4.87 =$204,522.35Hence, $204,522.35 is the lump-sum amount that needs to be accumulated by the end ofyear 12 by Broadbent group to provide for the 20 year $42,000 annuity.c) Annual deposits made during the accumulation periodThe present value of annuity equalling an amount of $204,522.35 can be treated as thefuture value of annuity payments to be accumulated between year 0 and 12 (Vernimmen, P. andet.al., 2014).Thus, PV at the end of year 13 in distribution period= FV at the end of year 12 inaccumulation period = $204,522.35Thus, FV of annuity = P*[((1+r)n-1)/r]$204,522.35 = P*[((1+0.09)12-1)/0.09]$204,522.35 = P*[((1.09)12-1)/0.09]1
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