BANK 2007 Business Finance: Financial Analysis and Investment Advice

This report delves into business finance principles, addressing client financial inquiries and investment strategies. It explores compounding techniques, comparing their effectiveness against non-compounding methods and analyzing monthly versus annual compounding. The report discusses the concept of intrinsic value, its impact on investment decisions, and what occurs when asset selling prices fall below intrinsic value. Practical scenarios, including present value calculations for various investment options and annuity evaluations, are presented to guide client decision-making. The analysis includes calculations for future value, annual payments on loans, and the impact of compounding frequency. Ultimately, the report advises clients to favor compound interest for investments and simple interest for borrowing, providing a comprehensive guide to informed financial choices. Desklib provides access to similar solved assignments and resources for students.

Business finance

Table of Contents
Clients financial questions...............................................................................................................3
1....................................................................................................................................................3
2....................................................................................................................................................3
3....................................................................................................................................................4
4....................................................................................................................................................4
Clients Investment...........................................................................................................................5
1....................................................................................................................................................5
2....................................................................................................................................................5
3....................................................................................................................................................5
4....................................................................................................................................................6
5....................................................................................................................................................7
a)..................................................................................................................................................7
b)..................................................................................................................................................7
REFERENCES................................................................................................................................1

INTRODUCTION
Business finance refers to the funds availed by the business owners for the start-up and
development of the businesses. The report will discuss the compounding technique of time value
of money to calculate the effective rate of interest. This report will also discuss why the non-
compounding technique is better than compounding technique along with why monthly
compounding is better than annual compounding. The report will also discuss the concept of
intrinsic value of assets and what happen when selling price of assets is lesser than the intrinsic
value. This report help in identifying business finance issues and their solution which help the
which company can attain its operational and financial objectives.
Clients financial questions
1.
The non-compounding technique is more preferable than annual compounding to the
investors because some time annual compounding became expensive as compared to monthly or
quarterly compounding. The annual interest is normally at higher rates because of the
compounding and when the investors get interest at the same rate throughout the year. Then
getting monthly and quarterly payment rather than annual payment is best as the investors will
get higher interest amount (Khechine, Raymond and Augier, 2020). But it is not that much affect
the income because basically there is no difference between the annual and monthly interest
when the investors want to withdraw the capital. The monthly interest income is preferable to the
investors even though the interest rate is lower because it provides cash in hand and strong
liquidity position to the investors.
2.
In case of simple interest rates, the interest amount is calculated on the outstanding principal
amount only and accordingly, the borrowing made on simple interest are considered to be
cheaper.
While in case of compounding interest rate, the amount of interest is calculated in each period on
the basis of outstanding principal amount + outstanding interest amount as well. Therefore, by
calculating an effective rate of interest is calculated for the purpose of determining the rate at
which interest is to be charged on the outstanding balance of both principal and interest amount
(Marty, 2020).

The differentiating interest amount can be illustrated as follows in case of both simple interest
and compound interest.
Effective rate of interest has to be calculated as follows in case of compounding interest rate:
Effective rate of interest = [1 + 0.092 / 12] 12 – 1 = 9.598%
Therefore, borrowing if done on simple interest rate will be costly due to a higher rate of 10%
interest charged and in case of compounding interest rate, it will cost 9.598% which is lower as
compared to simple interest rates. So, client would be suggested to borrow on compounding
interest rate basis.
3.
Intrinsic value is a measure which state the worth and value of the assets which is arrived
by using complex business model. It is basically the difference between the strike price of the
options and the current price of the underlying assets. The company estimate the intrinsic value
of assets using the fundamental and technical analysis because there is no standard model is
given for the intrinsic value calculations. Typically, investors try to use both qualitative and
quantitative method to measure the intrinsic value of the assets such as discounted cash flows.
The weighted average cost of capital is used to calculate the expected rate of return that an
investors wants to earn from their investment plan (García-Monleón, Danvila-del-Valle and
Lara, 2021). The investors need to understand that the intrinsic value is not real but an estimated
value which may be differed from the selling value of the assets. If the selling price is less than
its intrinsic value than investor will faces loss and in order to overcome it they need to increased
its stock and assets price to balance them. The intrinsic value of assets is less than its current
market value and selling price than its means assets are overpriced and need to be reduced.
4.
Effective rate is the one that create a compounding period in the duration of the payment plan.
This is denoted as the annual interest and compounding interest of different time frame. On the
other side nominal rate denote the interest payable in the respective time period. The key
difference between effective rate and nominal rate is that in context to effective rate the interest
is payable more as compare to the nominal rate (Irena and Mariana, 2017). The interest under the
effective rate increase as the time processes as it also consumes interest on interest like practice.
The role of the effective rate of interest is very effective in processing the loan rate to be higher.
The other side nominal rate does not charge interest over the interest which make this rate more

affordable in nature. When it comes to investment decision effective rate provide more retrain to
the investor whereas the nominal rate provide a limited return over investment made.
While evaluating investment opportunities, client must go for those opportunities offering
effective rate of return over nominal rate of return because in case of nominal returns interests in
the form of return are provided only on the basis of principal amount invested, whereas in case of
effective rate of return client can obtain higher returns as interests are provided on both principle
and interest amount that has been accumulated every year.
Clients Investment
1.
Option 1: Present value of Cash Inflow: $100000
Option 2: Present value of Cash Inflow: cash inflow each year* present value annuity due
@12% for 10 years ($10000* 6.328) = $63280
Option 3: Present value of Cash Inflow: cash inflow at the end of year* present value of 12% at
10th year ($50000 + 150000* 0.322) = $98300
On the basis of above calculation present value of cash flow of each alternative it is
recommendable to the client to opt for first option as its is more profitable than other alternatives
(Bai and Wang, 2020).
2.
To have an accumulated amount equivalent to 15000 in 15 years, the amount needed to be
invested each year will be calculated as follows:
FV = P * [ (1 + r)n – 1 / r ]
Here, FV is the future value that is, 15000
P is the periodic payment or Annuity = ?
r is the rate of interest per period = 10%
n is the number of period = 15 years
Compounding = semi – annually
therefore, n will be taken as 30 and r will be taken as 5%.
15000 = P * [(1 + 5%)30 – 1 / 5%
15000 = P * [4.322 – 1] / 0.05
15000 = P * 66.44
15000 / 66.44 = P

P = 225.77
Therefore, every year Client need to invest 225.77 in order to have amount equivalent to 15000
in 15 years.
3.
1st year = $10000* 5% = $10500
2nd year = $10500* 5% = $11025
3rd year = $11025* 5% = $11576
4th year = $11576* 5% = $ 12155
5th year = $12155* 5% = $12763 - $7500 = $5263
6th year = $5263* 5% = $5526
7th year = $5526* 5% = $5802
8th year = $5802* 5% = $6092
Amount remain in the client account at the end of the 5th year will be = $5263 approx. if they
deposit $10000 current at the rate of 5% p.a. and after withdrawing $7500 in 5th year. It is
assumed that client will withdraw this amount at the end of the year.
The amount remain in account in the eight year is = $6092 approx.
4.
Evaluation of two annuities
Particulars of first annuity
Payment per month = 2800
Annual fee = 0
number of periods = 5 years
Nominal rate = 9% p.a.
Rate per month = 0.09 / 12 = 0.0075
Particulars of second annuity
Payment per six month's period = 18000
Annual fee = 1000
Number of periods = 5 years
Nominal rate = 10% p.a.
Rate per six months = 0.1 / 2 = 0.05

lSt annuity 2ndannuity
payment per 6-month period 2800
payment per month 18000
Annual fee 0 1000
No. of period 5 5
nominal rate 0.09 0.1
rate per month 0.008
rate per six month 0.05000000
Present value of annual fee 4170
present value of annuity 136000.00 139798
effective present value of 136000.00 135628.00
The client would be recommended with the first annuity due to its effective net present value
being higher than the second annuity.
5.
a)
The current annual payment on the loan at the end of year if they pay interest @ 9.5% p.a. but
compounded annually is $13072995.82. It means that the current annual payment need to be paid
by the client is $13072995.82.
b)
If the client business switches to the payment at the beginning of each quarter than its current
quarter payment @ 9.5% and compounded annually will be $315618.92. The formula used for
this is A = P (1 + r/n)nt.
CONCLUSION
From the above report it has been concluded that while making investments and
borrowing, it is necessary to consider the interest components attached to it. In this report various
alternative proposals have been concluded on the basis of how simple interest and compound

interest rates works and also the impact of time value of money has been evaluated that helps in
making it clear to the client what they needs to save today to get the required amount in future.
As per the findings of this report, it is to be recommended that while investing client should
choose investment opportunities having compound interest rate attached to it over simple interest
rate and at the time of borrowing, client should go for obtaining loan at a simple interest rates
over compound interest rates due to being cheaper.

REFERENCES
Books and journals
Bai, B. and Wang, J., 2020. The role of growth mindset, self-efficacy and intrinsic value in self-
regulated learning and English language learning achievements. Language teaching
research, p.1362168820933190.
García-Monleón, F., Danvila-del-Valle, I. and Lara, F. J., 2021. Intrinsic value in crypto
currencies. Technological Forecasting and Social Change. 162. p.120393.
Irena, M. and Mariana, B., 2017. The Time Value of Money in Financial Management. Ovidius
University Annals, Economic Sciences Series. 17(2). pp.593-597.
Khechine, H., Raymond, B. and Augier, M., 2020. The adoption of a social learning system:
Intrinsic value in the UTAUT model. British Journal of Educational
Technology. 51(6). pp.2306-2325.
Marty, W., 2020. The Time Value of Money. In Fixed Income Analytics (pp. 5-17). Springer,
Cham.
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