Client’s Investments, Calculation of market value, Best alternative

This document provides study material on client's investments, calculation of market value, and best alternative in the field of finance. It includes information on standard deviation, calculation of market value using WACC, and comparison of projects using average cost of return and net present value methods. The subject is financial and the document type is study material.

Financial

Table of Contents
Client’s Investments........................................................................................................................3
1. Standard deviation...................................................................................................................3
2. Calculation of market value.....................................................................................................3
3. Best alternative........................................................................................................................4

Client’s Investments
1. Standard deviation
Possible returns
Probabilit
y
Expected
return
-37% 10% -3.70%
0% 20% 0.00%
16% 55% 8.80%
32% 15% 4.80%
SD 5.47%
Beta Value 1.30
Company’s standard deviation is lesser than market’s standard deviation of 10.2% this indicates
that company’s share is less risky and has constant return compare to market. Hence, it is good
idea for the Short Stop to invest in this company.
2. Calculation of market value
WACC=(E/V×Re)+(D/V×Rd×(1−Tc))
Where:
E=Market value of the firm’s equity
D=Market value of the firm’s debt
V=E+D
Re=Cost of equity
Rd=Cost of debt
Tc=Corporate tax rate
Market value of the firm’s equity (E) = Preference shares + Ordinary shares
= 5,000,000 + 20,000,000 = 25,000,000
Market value of firm’s debt (D) = 50,000,000

V = 75,000,000
Re = (0.71/4.56) + (0.12/0.88)
= 0.158 + 0.136 = 0.29
Rd = 4% or 0.04
Tc = 30% or 0.30
WACC = ( 25,000,000
75,000,000 × 0.29 ) + ( 50,000,000
75,000,000 ×0.04 × ( 1−0.30 ) )
= 0.096 + 0.0186
= 0.1153 or 11.53%
The required rate of return is 10%, while the actual rate of return is 11.53% which is higher than
required one. Thus, the result shows that WACC is not sufficient.
3. Best alternative
Average cost of return of both projects:
Project 1 = Average return / Initial investment
= $1,500,000 / $1,000,000
= 1.5
Project 2 = $1,800,000 / $2,200,000
= 0.82
The ARR result shows that Project 1 is better than Project 2
Application of Net present value method:
Project 1 Project 2 Project 1 Project 2
Yea
r Cash flows Cash flows
Discounting
factors @15% DCF DCF
0
$
1,000,000
$
2,200,000
$
1,000,000
$
2,200,000
1
$
1,500,000
$
1,800,000 0.869565217
$
1,304,347.83
$
1,565,217.39
2 $ $ 0.756143667 $ $

1,500,000 1,800,000 1,134,215.50 1,361,058.60
3
$
1,500,000
$
1,800,000 0.657516232
$
986,274.35
$
1,183,529.22
4
$
1,500,000
$
1,800,000 0.571753246
$
857,629.87
$
1,029,155.84
5
$
1,500,000
$
1,800,000 0.497176735
$
745,765.10
$
894,918.12
6
$
1,500,000
$
1,800,000 0.432327596
$
648,491.39
$
778,189.67
7
$
1,500,000
$
1,800,000 0.37593704
$
563,905.56
$
676,686.67
8
$
1,500,000
$
1,800,000 0.326901774
$
490,352.66
$
588,423.19
9
$
1,500,000
$
1,800,000 0.284262412
$
426,393.62
$
511,672.34
10
$
1,500,000
$
1,800,000 0.247184706
$
370,777.06
$
444,932.47
11
$
1,500,000 0.214943223
$
322,414.83
12
$
1,500,000 0.18690715
$
280,360.73
NPV
$
7,130,928.50
$
6,833,783.53
The outcome of NPV also favors the result identified through ARR. Project 1 have more positive
NPV compared to Project 2. Thus Project 1 is most beneficial from a valuation perspective.