Comprehensive Business Finance Report: Calculations and Analysis

This report provides a comprehensive analysis of business finance, covering key concepts and calculations. It begins with an introduction to business finance and its importance, followed by a detailed examination of bond valuation, including the impact of interest rate changes and the calculation of coupon payments and present values. The report then explores the relationship between share prices and investor returns and dividend growth, with calculations for required rates of return and share prices. It also includes a thorough analysis of portfolio management, calculating arithmetic and geometric average returns, portfolio weights, returns, and risks, as well as the benefits of diversification. Furthermore, the report delves into the calculation of market value, capital structure weights, and weighted average cost of capital (WACC) for a company. It also discusses key considerations when choosing a venture capitalist, the costs associated with cash imbalances, and the calculation of the operating cash cycle. The report concludes with references to relevant academic sources.

Business Finance

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
Question 1....................................................................................................................................1
Question 2....................................................................................................................................2
Question 3....................................................................................................................................2
Question 4....................................................................................................................................4
Question 5....................................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Business finance can be defined as the funding which is required by an organisation to
carry out all the operations successfully. If the businesses will not be able to manage it properly
then it may leave negative impact upon functionality of business. In order to attain sustainability,
it is essential for all the companies to make sure that they are having sufficient business finance.
Lack of it will result in failed execution of all the operations (Adhikary and Kutsuna, 2016). This
assignment is based upon analysis of different types of terms of business finance and calculation
various aspects in relation to it. Some of the main topics that are covered in it are changes in
bond value, analysis of corporate bond, relation between share price and other elements, analysis
of value of share price, calculation of arithmetic and geometric return, determination of value of
portfolio etc. Additionally, calculation of market value, capital structure and WACC of a
company along with consideration of choosing venture capitalist, cost of having too much or less
cash and calculation of operating cash cycle are also covered in this report.
Question 1
a. Changes in the value of Middleton’s bond: If the interest rate will be increased up to
12.52% then the value of bond will fall. The risk which is associated with interest risk
specifies that bond value and interest rate are proportional inversely and it is the main
reason for decrement in the value of bond (Bendell and Doyle, 2017).
b. Calculation of different elements of corporate bond:
1. Coupon payment of bond:
Formula: Value of bond * coupon rate
= 1000 * 10.5%
= 105
Semi annual value of coupon payment = 105 / 12 * 6
= 52.5
2. Present value of bond:
The total value of bond = 1000
Interest rate is 10.5%
The present value index for 10.5% for 20 years is 0.13575 so the present value of the bond
will be 135.75 and the total interest will be 864.25.
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3. When coupon payment will be paid annual then value of bond:
If the coupon payment will be made on yearly basis then the value of bond will be increased
by the total coupon payment. So, it will be 1000 + 105 = 1105.
Question 2
a. Relationship between different elements:
1. Relationship between share price and investors required rate of return: All the
investors who have invested in an entity or willing to invest in a new company analyse
share price to determine the ability of the entity to provide them higher returns on their
funds (Ylhäinen, 2017).
2. Relationship between share price and dividend growth rate: While analysing the
rate of growth in the dividend all the shareholders analyse the share price. When it will
be high as compared to other entities then they will get high dividend. It will help them
to determine that dividend growth rate is high or not (Burns and Dewhurst, 2016).
b. Required rate pf return for Otama Ltd:
Formula: Growth rate in dividend + Fixed dividend / current value of stock * 100
= 0 + 2.85 / 77.32 * 100
= 0 + 0.3685 * 100
= 3.69%
c. Amount required to be paid to buy share of Price Tigers Ltd:
Formula: P0= D1/ (R - g)
D1 = 3.25
R = 11%
g = 5.1%
= 3.25 / (0.11 – 0.051)
= 3.25 / 0.059
= 55.08
Question 3
a. Calculation of arithmetic and geometric average return:
Arithmetic average return: Total of all the return rates / number of years
= 10.5 + 12.5 + (-5.5) + 2.8 / 4
= 20.3 / 4
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= 5.075
Geometric average return: √ (1 + r1) * (1 + r2) * (1 + r3) * (1 + r4) – 1
= √ [1 + 0 .105] * [1 + 0.125] * [1 + (-0.055)] * [1 + 0.028] – 1
= √1.105 * 1.125 * 0.945 * 1.028 – 1
= √1.202 – 1
= √0.202
= 0.449 or 44.9
b. Calculation of different elements related to portfolio:
1. Portfolio weights:
Stock A Weight B Weight
E (R) 15 0.375 10 0.3125
Standard
deviation
25 0.625 22 0.6875
Total 40 1 32 1
2. Portfolio return: It has been estimated that A is having high risk and b is having low
risk.
Stock A B
Value Return weight Value Return weight
E (R) 18750 15 0.375 7813 10 0.3125
Standard
deviation
31250 22 0.625 17187 22 0.6875
Total 50000 40 1 25000 32 1
3. Portfolio risk: Formula = Total return * correlation
Portfolio risk for a:
= 40 * 0.20
= 8
Portfolio risk for b:
= 32 * 0.20
= 6.4
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4. Comparison of portfolio risk with individual stock and identification of benefit of
the diversification of the portfolio:
The risk which is associated with stock A is very high as compare to the stock b. When the
risk is high then higher returns could be generated by the investor on the project so the risk
associated with A is high. There is diversification in the portfolio and it is beneficial for the
investor as it can help to assure some specific returns on stock B as it is having lower risk. If the
portfolio will be selected for investment purpose then it will help the investor to generate higher
returns with lower as well as high risk stock (Jordà, Schularick and Taylor, 2016).
Question 4
Details related to all the securities of the entity:
Securities Value Rate of return
Ordinary shares 45000 10%
Preference share 30000 12%
Bond 2500 15%
1. Calculation of market value:
Securities Value Market price Market value
Ordinary shares 45000 110 4950000
Preference share 30000 105 3150000
Bond 2500 1100 2750000
Market value of firm 10850000
2. Calculation of capital structure weights:
Securities Value Total value Weights
Ordinary shares 45000 4950000 0.46
Preference share 30000 3150000 0.29
Bond 2500 2750000 0.25
Total 10850000
3. Calculation of weighted average cost of capital:
Formula: E / v * Re + P / v * Rp + D / v * Rd * (1-Tax)
= (4950000 / 10850000) * 100 + 3150000 / 10850000 * 100 + 2750000 / 10850000 * 1100 * (1-
30%)
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= 45.62 + 29.03 + 278.80 * 0.70
= 353.45 * 0.70
= 247.415 WACC
Question 5
a. Key considerations of choosing a venture capitalist:
 One of the major considerations is long-term sustainability which is analysed while
choosing a venture capitalist as it helps to determine that the venture will be able to
survive in the market or not (Nyman, 2016).
 Another consideration is innovative idea. If the idea of new venture is innovative then it
can attain competitive advantage as compare to other companies and generate higher
profits (Kennickell, Kwast and Pogach, 2016).
 Financial outlook is also a factor which is focused while choosing a venture capitalist
because if the venture will be financially viable then it will attract large number of
investors and sustain in the industry.
b. Cost of having too much or too little balance of cash in a business: If a business is
having too little or too much balance of cash then it may result in withdrawal of interest
of investors and legal actions against the business. When the cash will eb very low it will
reduce the engagement of stakeholders in business. In case of too much cash balance
legal actions could be faced by the entity as all the businesses are required to maintain a
minimum balance and if it will cross the limit then legal actions will be taken (Loughran
and McDonald, 2016).
c. Calculation of operating cash cycle:
Formula: Days of sales outstanding + Days of inventory outstanding - days of payable
outstanding:
= 135.78 + 71.16 – 152.53
= 54.41
The operating cash cycle will be 54.41 days.
Calculation of days of sales outstanding:
Formula: Average account receivable / revenues * days in year
= 4650 / 12500 * 365
= 0.372 * 365
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= 135.78 days
Calculation of days of inventory outstanding:
Formula: Average inventory / cost of sales * days in year
= 1852 / 9500 * 365
= 0.194 * 365
= 71.16 days
Calculation of days of payable outstanding:
Formula: Average accounts payable / cost of sales * days in the year
= 3970 / 9500 * 365
= 0.417 * 365
= 152.53 days
Working notes:
All the average balances are calculated by adding the opening and closing balance and then
divide them by 2. The calculations are as follows:
Average account receivables: 4920 + 4200 / 2
= 9120 / 2
= 4650
Average account payables: 2560 + 2820 / 2
= 5380 / 2
= 3970
Average inventory: 1738 + 1965 / 2
= 3703 / 2
= 1852
CONCLUSION
From the above project report it has been concluded that business finance is one of the
essential requirements of businesses which are required to be fulfilled to meet the long-term
objectives. If a company is not able to acquire it then it will leave negative impact upon
functionality of business. Apart from this, it will also result in failure of predetermined
operations. The availability of it will facilitate to carry out all the operations systematically.
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REFERENCES
Books and Journals:
Adhikary, B. and Kutsuna, K., 2016. Small Business Finance in Bangladesh:
Can'Crowdfunding'Be an Alternative?. Review of Integrative Business and Economics
Research. 4. pp.1-21.
Bendell, J. and Doyle, I., 2017. Healing capitalism: five years in the life of business, finance and
corporate responsibility. Routledge.
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Jordà, Ò., Schularick, M. and Taylor, A. M., 2016. The great mortgaging: housing finance, crises
and business cycles. Economic policy. 31(85). pp.107-152.
Kennickell, A. B., Kwast, M. L. and Pogach, J., 2016. Small businesses and small business
finance during the financial crisis and the great recession: New evidence from the
survey of consumer finances. In Measuring Entrepreneurial Businesses: Current
Knowledge and Challenges (pp. 291-349). University of Chicago Press.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A
survey. Journal of Accounting Research. 54(4). pp.1187-1230.
Nyman, R. B. E., 2016. An Algorithmic Investigation of Conviction Narrative Theory:
Applications in Business, Finance and Economics (Doctoral dissertation, UCL
(University College London)).
Ylhäinen, I., 2017. Life-cycle effects in small business finance. Journal of Banking & Finance.
77. pp.176-196.
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