Business Finance Homework Assignment: Comprehensive Solutions

This document presents a comprehensive solution to a business finance assignment, covering a range of topics including loan calculations, bond valuation, share price analysis, investment appraisal (NPV and IRR), and financial ratio analysis. The solution provides detailed calculations for loan amortization, bond pricing, and dividend discount models. It also includes an analysis of project viability using NPV and IRR, comparing different investment scenarios. Furthermore, the assignment explores financial ratios such as quick ratio, cash ratio, and profitability ratios, offering insights into a company's financial health and performance. The solution provides explanations and interpretations of the results, supported by relevant references, offering a thorough understanding of key finance concepts.

Running head: BUSINESS FINANCE
Business Finance
Name of the Student:
Name of the University:
Authors Note:

BUSINESS FINANCE
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Table of Contents
Answer to 1.1:............................................................................................................................3
Answer to 1.2:............................................................................................................................3
Answer to 1.3:............................................................................................................................3
Answer to 1.4:............................................................................................................................3
Answer to 1.5:............................................................................................................................4
Answer to 1.6:............................................................................................................................4
Answer to 1.7:............................................................................................................................5
Answer to 1.8:............................................................................................................................5
Answer to 1.9:............................................................................................................................5
Answer to 2.a:............................................................................................................................5
Answer to 2.b:............................................................................................................................6
Answer to 2.c:............................................................................................................................6
Answer to 3:...............................................................................................................................7
Answer to 4:...............................................................................................................................7
Answer to 5.a:............................................................................................................................8
Answer to 5.b:............................................................................................................................8
Answer to 5.c:............................................................................................................................8
Answer to 5.d:............................................................................................................................8
Answer to 6.a:............................................................................................................................9
Answer to 6.b:............................................................................................................................9
Answer to 6.c:............................................................................................................................9
Answer to 7:.............................................................................................................................10
Answer to 8.a:..........................................................................................................................10
Answer to 8.b:..........................................................................................................................10

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Answer to 8.c:..........................................................................................................................10
Answer to 8.d:..........................................................................................................................11
Answer to 8.e:..........................................................................................................................11
Answer to 8.f:...........................................................................................................................11
Answer to 9:.............................................................................................................................11
Answer to 10.a:........................................................................................................................13
Answer to 10.b:........................................................................................................................13
Answer to 10.c:........................................................................................................................14
Answer to 10.d:........................................................................................................................14
Answer to 10.e:........................................................................................................................14
Reference and Bibliography:....................................................................................................15

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Answer to 1.1:
Particulars Amount
Total interest rate 8%/12 = 0.67%
Amount for loan $20,000,000.00
Time 10 * 12 = 120
Total monthly payments $ 242,655.19
Answer to 1.2:
Particulars Amount
Total interest rate 8%/12 = 0.67%
Amount for loan $ 20,000,000.00
Interest Payment 1st year $ 133,333.33
Answer to 1.3:
Particulars Amount
Interest Payment 1st year $ 133,333.33
Total monthly payments $ 242,655.19
Principal Payment 1st year $ 109,321.86
Answer to 1.4:
Particulars Amount
Total monthly payments $ 242,655.19
Total interest rate 8%/12 = 0.67%
Time 7 * 12 = 84

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Amount owed (Loan) $ 15,568,577.62
Answer to 1.5:
Particulars Amount
Amount owed (Loan) $ 15,568,577.62
Cost for Refinance $250,000
Total interest rate 7%/12 = 0.58%
Tenure 7 * 12 = 84
Monthly instalments $ 242,655.19
Loan payments (Monthly) $234,971.56
Difference in payments $7,683.63
Particulars Amount
Difference in payments $7,683.63
Rate 7%/12 = 0.58%
Time 7 * 12 = 84
Present value of difference in payments $ 509,096.39
Answer to 1.6:
Particulars Amount
Amount for loan $20,000,000.00
Actual building value $ 25,000,000.00
Interest rate 8%/4 = 2.00%
Time 10*4 = 40

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Payments in quarterly $731,115.96
Answer to 1.7:
Particulars Amount
Payments in quarterly $731,115.96
Time 7*4 = 28
Interest rate 8%/4 = 2.00%
Payments in 3 years $ 15,559,056.50
Answer to 1.8:
Particulars Amount
Interest rate 8%
Answer to 1.9:
Particulars Amount
N 5.00
r 8%/12 = 0.67%
Effective annual rate (EAR) 4.90
Answer to 2.a:
Particulars Amount
Time 10.00 years
Current price $100.00
Current price $78.12
Return 2.50%

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Answer to 2.b:
Particulars Amount
Current price $100.00
Bond price $ 78.12
Time 9
Current price $ 73.37
Loss $ 4.75
Answer to 2.c:
Particulars Amount
FV 1000
rate 3.50%
n 9
Bond price 1000
Coupon payment rate 2.50%
Market price $923.92
Loss $76.08
Particulars Amount
Percentage of loss 8.23%
Percentage of loss 6.08%
From the relevant calculations conducted in the above table the overall percentage of
loss from bond is relatively higher than the loss conducted from share price.

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Answer to 3:
Particulars Amount
Next Annual dividend $ 3.70
Dividend growth rate 5.00%
Market return 11.00%
Expected Share price of McDonalds $ 61.70
Particulars Amount
Next annual dividend 3.70
Dividend growth rate 5.00%
Return from investment 6.00%
The above calculations mainly indicate expected share price of McDonalds from
$61.70. Furthermore, the theoretically price of the company is relatively lower than the actual
share price of McDonalds. Moreover, calculation of the overall return that is generated from
investment is 6%.
Answer to 4:

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Answer to 5.a:
Answer to 5.b:
Answer to 5.c:
Answer to 5.d:
The calculation conducted in IRR and NPV mainly indicates the positive attributes of
the overall project. The NPV is mainly at the levels of $8,672.54, which is relatively positive
and indicate viability of the project. In addition, the IRR is mainly at the levels of 16%, which

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is higher than cost of capital of 12%, which portrays financial performance of the project
(Balakrishnan, Watts & Zuo, 2016).
Answer to 6.a:
Answer to 6.b:
Answer to 6.c:
The major difference in ranking is due to the investment appraisal techniques used in
ranking the project. The investment appraisal technique such as NPV and IRR is mainly used
in deriving the rank of both the projects. According to NPV valuation the Renovate project is
viable, while Replace project is considered viable in case of IRR. The calculation of IRR and
NPV is the main reason behind the difference in ranking of both the projects (Loughran &
McDonald, 2016).

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Answer to 7:
Answer to 8.a:
Answer to 8.b:
Answer to 8.c:

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Answer to 8.d:
Answer to 8.e:
Answer to 8.f:
Answer to 9:
Ratios Explanation
Quick ratio The quick ratio calculation allows the investors in identifying
ability of the company to support its financial obligations by
selling its current assets. The quick ratio mainly needs to be over
1, which indicates financial performance of the organisation
(Goyal & Bhatia, 2016).
Cash ratio Cash ratio allow the investor in detecting the overall cash, which is
currently available to the company. This also helps in identifying
whether the company could face short term liquidity issue, which
could hamper its operational capability.
Capital intensity ratio The capital intensity ratio is mainly used in comparing the capital