Business Finance Assignment: Valuation, Risk and Return Analysis

This finance assignment provides a comprehensive analysis of key financial concepts, including time value of money (TVM), bond valuation, and risk and return analysis. The assignment begins with calculations related to loan amounts, future value of sales, effective annual rates (EAR) of loans, and bond yields. It then moves on to a risk and return analysis, calculating expected returns using the Capital Asset Pricing Model (CAPM) for a company and a hypothetical company, and analyzing portfolio returns and beta. The assignment also explores the relationship between risk and return in investment decisions, including the impact of systematic and unsystematic risk, and the importance of diversification. The student has applied the concepts to make investment decisions. The assignment concludes with a detailed discussion of the portfolio's return and beta and the implications for investors.

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Business Finance

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Table of Contents
1..................................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................3
c).............................................................................................................................................3
d)............................................................................................................................................4
e).............................................................................................................................................4
f).............................................................................................................................................4
Question 2..................................................................................................................................5
a).............................................................................................................................................5
b)............................................................................................................................................5
Question 3..................................................................................................................................6
a).............................................................................................................................................6
References..................................................................................................................................8
Appendix....................................................................................................................................9

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1.
a)
In the company, there are various borrowings which are made and for that, there is the
installment which is paid on a timely basis. The amount of loan which is taken by the
company is calculated below.
Particulars Amount
amount of Instalment 891
Interest rate 0.5
Period 60
The present value of
borrowings
46087.47
b)
The sale in the company is made at $247.7 each year and it has been identified that this will
be increasing in all the coming years at a specified rate. The sale which will be made by the
company in five years amounts to the following:
Particulars Amount
Annual revenue 247.7
Annual growth
rate
9.90%
Time period 5
Future value
multiplier
1.603
Sales in 5 years 397.11
c)
The loan which is taken comprises the cost which is to be incurred and the rate at which this
will be made possible is identified as the effective rate of the loan. The calculation for the
same is done below on the basis of the APR which has been provided.
Particulars APR Period EAR
Loan A 5.45% 12 5.59%
Loan B 5.50% 2 5.58%
Loan C 5.40% 365 5.55%

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The company will be required to make the least cost on Loan C as the EAR for the same is
derived to be 5.55% and this will be the best choice for the business.
d)
The BLX has made an investment in the property and for that, there is the undertaking of
loan. The same will be required to be repaid by the company in half-yearly installments in the
next 20 years. The amount which will be paid with each installment is calculated below.
Particulars Amount
Loan amount 1650000
Period 40
Rate 2.1
Instalment 61379.81
e)
The company is having the bond of faced value 1000 and with the coupon rate of 5.85%. This
will be maturing in 6 years and on that certain yield will be involved. The calculation of the
same is provided below:
Particulars Amount
Face value 1000
Maturity 6
Coupon rate 5.85%
Current price 922
Interest 58.5
YTM 7.51%
f)
The value which is prevailing in the market is identified as the current market price and that
shall be ascertained. This helps in evaluating the position of the bond and the calculation is
made for the same and represented to have proper understanding.
Particulars Amount
Face value 100
Coupon rate 5%
Maturity 4

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Required rate 5.80%
Interest 2.5
Market value -97.18
Question 2
a)
The shares of the company are traded in the market and on that there is an expected return
that is involved. It is required to be calculated and in the given case a hypothetical company
is also provided for which also the calculation will be made. This will be done with the help
of the capital asset pricing method in which the market return and beta are taken into
consideration (Da, Guo and Jagannathan, 2012).
Particulars BLX Hypothetical
company
Risk free rate (Rf) 0.68 0.68
Market risk premium
(Rp)
5.5 5.5
Beta (b) 0.94 1.6
CAPM Rf + b*Rp
Expected return 5.85 9.48
b)
The portfolio is created for the company and hypothetical stock with the weights of 0.70 and
0.30 respectively. For them, the return which will be made on the portfolio and risk
incorporated in the form of the beta will be ascertained and the same is provided below.
Particulars Weights Expected
return
Beta Weighted
return
weighted
beta
BLX 0.7 5.85 0.94 4.095 0.658
Hypothetical
company
0.3 9.48 1.6 2.844 0.48
Portfolio return 6.94
Portfolio beta 1.14

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Question 3
a)
The decision making is an important requirement in any business and for that, there are
various aspects that need to be considered. In making the investment to any stock there is the
consideration of the risk and return which are involved. Both of these concepts are equally
important to be considered in the investment decision (Gurrib and Alshahrani, 2012). There is
a strong relationship that exists among them and shall be understood in an adequate manner.
The evaluation in the given case has been made for the BLX and in relation to that, all the
information has been considered. The calculation of the expected return which will be
available is derived with the help of the capital asset pricing model (Wang, Li and Watada,
2017). In order to take the appropriate decision, there is the need to compare the options
which are available and for a hypothetical company that has been involved in the process.
The whole economy is affected by various factors and in the current situation, there is a large
spread of coronavirus which is affecting the economy in an adverse manner. There is a
decline in the market and the risk-free rate is also at a low level due to the same.
The portfolio has been formulated by taking 70% of the BLX and the remaining 30% for the
hypothetical company. With that, the portfolio return is ascertained that is identified to be
6.94%. There is the consideration of the beta also and for that, the portfolio beta has been
calculated by using the available weights and individual beta. This has been derived at 1.14
(Capitaliq, 2020). The return is considered to be optimal as this is converting the market
premium and so the portfolio will be maintained in an effective manner. There is the
involvement of two types of risks which include systematic and unsystematic risk. Out of
them, the unsystematic risk can be adjusted as the systematic risk is fixed and cannot be
altered (Rehring, 2012). The beta is used to make the proper evaluation and if the same is less
than 1 then the portfolio is less volatile and if the same is higher than 1 then it represents
higher volatility and risk.
The beta is ascertained at higher than one and that shows the aggressiveness of the portfolio.
The risk and return are related as with the higher risk there will be a higher return and vice-
versa. The same is noted in a given case as BLX is having lower risk and lower return in
comparison to a hypothetical company (Capitaliq, 2020). The diversification of the portfolio
is suggested with the portfolio theory as by that the elimination of the unsystematic risk is

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possible and that manages the risk and return relation. The same is done and the adequate
balance in the portfolio has been created. The beta which is derived in lower than the market
beta and also the return is higher than the market premium. This information will be of great
use to the investors as they will be analyzing the stocks and then will take the best decision.

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References
Capitaliq. (2020) Australia Government Debt Interest Rate Profile. [Online] Available at:
https://www.capitaliq.com/CIQDotNet/MacroEconomics/InterestRate.aspx?
companyId=50027527 [Accessed 13 April 2020]
Capitaliq. (2020) Beacon Lighting Group Limited (ASX: BLX) Public Company Profile.
[Online] Available at: https://www.capitaliq.com/CIQDotNet/company.aspx?
companyId=260249793 [Accessed 13 April 2020]
Da, Z., Guo, R.J. and Jagannathan, R. (2012) CAPM for estimating the cost of equity capital:
Interpreting the empirical evidence. Journal of Financial Economics, 103(1), pp.204-220.
Gurrib, I. and Alshahrani, S. (2012) Diversification in Portfolio Risk Management: The Case
of the UAE Financial Market. International Journal of Trade, Economics and Finance, 3(6).
Rehring, C. (2012) Real estate in a mixed‐asset portfolio: The role of the investment
horizon. Real Estate Economics, 40(1), pp.65-95.
Wang, B., Li, Y. and Watada, J. (2017) Multi-period portfolio selection with dynamic
risk/expected-return level under fuzzy random uncertainty. Information Sciences, 385, pp.1-
18.

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Appendix

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