Corporate Finance Assessment 1: Solutions, Calculations, Analysis

This document presents solutions to a Corporate Finance assessment, addressing several key areas. Question 1 involves calculating the annual savings required for retirement planning, considering an 8% interest rate and a target retirement fund. Question 2 delves into bond valuation, providing a table to analyze the relationship between Yield to Maturity (YTM) and bond prices. Question 3 focuses on stock valuation, calculating expected dividends, stock prices, and investor returns based on dividend growth. Finally, Question 4 explores ethical considerations in marketing and business practices, analyzing the impact of false advertising and unethical decision-making, including a case study on the closure of a manufacturing unit and its ethical implications.

Corporate Finance
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Assessment 1
Question 1
Part A
Rate of interest will be 8%.
Amount to be saved for the retirement will be $ 30,000 * 25 = $ 750,000.
Now calculation amount to be saved every year so that end the end of 50 year total amount saved
will be $ 750,000.
A = P (1 + r /100) n
Where,
P = annual deposit to be made.
A = amount received at the end of period.
$ 750,000 = P (1 + 8/ 100)4
P = $ 750,000 * .021321
P = $ 15,990.75
Therefore $ 15,990.75 should be saved annually so that at the end of 50 year there will be $
750,000 which will be enough for the next 25 years.
Part B
a. Annual payment amount will be $ 293
b. Schedule given in question is as follows :
Year Loan Balance Interest for the Payment at Dec Loan
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at Jan 1 Year 31 Amortization
20x1 1000 72 293 779
20x2 779 54 293 540
20x3 540 34 293 291
20x4 291 12 293 0
20x5
Question 2
a. The calculation are as follows :
Note: in all the calculation the face value as well as the redemption value of the bond is taken as
$ 100.
Calculation of calculating bond is given the table below.
Column A Column B Column C Column D Column E
YTM Price of
Bond A
Price of Bond B % in price of
Bond A at YTM
% in price of Bond
B at YTM in
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( In $) ( In $) in column 1 /
price at YTM of
8%
column 1 / price at
YTM of 8%
2% 145 325 2.647918188 2.237675571
3% 119.66 277.18 2.185171658 1.90842743
4% 100 239.06 1.826150475 1.645965299
5% 84.52 208.16 1.543462381 1.433213991
6% 72.36 183.08 1.321402484 1.260534288
7% 62.58 162.34 1.142804967 1.117736161
8% 54.76 145.24 1 1
9% 48.41 138.97 0.884039445 0.956830074
10% 43.21 118.93 0.78907962 0.818851556
11% 38.93 108.73 0.71092038 0.748622969
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12% 35.35 100 0.645544193 0.68851556
13% 32.35 92.47 0.590759679 0.636670339
14% 29.81 85.97 0.544375457 0.591916827
15% 27.62 80.62 0.504382761 0.555081245
2% 3% 4% 5% 6% 7% 8% 9% 10
% 11
% 12
% 13
% 14
% 15
%
0
0.5
1
1.5
2
2.5
3
Series 1
Series 2
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Question 3
a. Expected dividend in the future year
Year Dividend
2002 1.2
2003 1.44
2004 1.728
2005 2.0736
b. Stock price on January 1, 2006
Formula for calculation of value of equity
Value of equity = Dividend of next year / (Cost of equity – Growth rate)
= 1.96992 / (.10 – (-.05))
= 1.96992 / .15
= $ 13.133
c. Stock price on January 1, 2002
Formula for calculation of value of equity
Value of equity = Dividend of next year / (Cost of equity – Growth rate)
= 1.44 / (.10 - .20)
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= $ 14.4
d. Dividend yield for year 2002
Dividend yield = dividend of the year / price of the dividend
= (1.2 / 14.4) * 100
= 8.33%
e. Stock price on January 1, 2003
Formula for calculation of value of equity
Value of equity = Dividend of next year / (Cost of equity – Growth rate)
= 1.728 / (.10 - .20)
= $ 17.28
f. Expected return of investor who buy stock on Jan 1, 2002 and sell it on Jan 1, 2003
Calculation of return
Total return received =
Return in form of interest = $ 1.2
Return from purchase an sell = $ 17.28 - $ 14.4
= $ 2.88
Total return = $ 1.2 + $ 2.88
= $ 4.08
Return in percentage = (4.08 / 14.4) * 100
= 28.33%
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g. The stock is giving more return than the required rate of return. This is a good sign and this stock
should be purchased.
Question 4
Part A
It is illegal for any organization to deceive or mislead or produce false information about the
product or its own financial position. A real life scenario is that a company engaged in
production of computer hardware claims that its products are compatible with all the computers
and operating system. In the real situation this turns out to be false as it does not work properly
with some computer’s operating system. It is the duty of the organization’s management
committee to avoid such disinvestment on their part even if such disinvestment is unintentional.
The management should check the truthfulness of any information before advertising it.
Unethical marketing planning will lead to dissatisfaction among the customers which will, in
turn, make the overall operations of the business enterprise complicated. Analytical approach to
false marketing will disrupt the coordination among various activities running out in different
departments of the business firm.
Part B
In the overall business sense, the importance and need of ethics and moral values is highly
required. The general ethical attitude of the management and other key person associated with
the business help them to take more accurate and better decision. Decisions here in the case are
not only just in the benefits of the company but also the overall interest of the public at large,
employees associated with the business group and other stakeholders are taken into account
(Crane & Matten, 2016). Management viewpoint of giving due importance and respect to the
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ethical culture in the organisation will create a force in which various aspects of social, economic
and moral behavior do exist. Ethical decision making is very good for the growth and survival of
the company, ethical decision making is not an easy process, sometimes it involve some
complications. For Example if a company is planning to plan to shut down a manufacturing unity
of the organization because of excess pollution and environment protection is ethical from
environment point of view. But at the same time such closing of manufacturing unit will cost the
jobs of many employees and will be unethical from their point of view. Providing employment to
such a large workforce is practically impossible by the company in short period. Such employees
need to find new jobs for running their family.
Part C
In the above given case the closing of manufacturing unit is ethical from the environment point
of view, as the environment will regain it organic component and the organic life of that
environment will be free from pollution. This will not only improves the health of the employees
as the working environment and safety is improved on the higher part but will also removes the
loopholes that will leads to compliance and legal conflicts. The overall objectives and the ethical
behavior of both organsiation and its employees influence the values of the enterprise as a whole.
Implanting the ethical culture at workplace is not only beneficial for the group from the social
point of view but also economic considerations are also achieved (Ferrell & Fraedrich, 2015).
On the other hand the employees who have lost their job because of company’s decision of
closing such manufacturing unit will have to pay their price. The economic structure of the
family of these employees will get disturbed. Company also incurs large loss of closing the
manufacturing unit. The ultimate sufferers are the employees and laborers associated with the
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group, no compensation can meet out their requirements of their livelihood of their families of
the long span of time. Law cannot protect the society at a large, as a general saying it is been
observed that where the system of law and compliance fails the ethics can succeed. An ethical
oriented management of a business organsiation can take care of issues associated with the
employee’s health and livelihood and protect them even if it is not compulsorily mandated by the
law.
Part D
Personally the unemployment rate in that area will get increased as large workforce gets
unemployed. Secondly the living standard of the employees and their families is greatly affected
if they do not found any other income generating source.
Consequence of the above decision on the on the company is making huge loss as the
manufacturing unit get closed. Even, if company decided to shift the unit than also it will cost
huge capital expenditure. The company might be able to face out certain legal hurdles of not
meeting out the compliances of the relevant law of the land. Additionally the judiciary of the
region may ask to pay a heavy compensation to the employees for retrenching them from their
jobs.
Socio economically the manufacturing unit is playing an important role in improving the lifestyle
of the general public around that social group. Their personality gets developed by acting in
professional environment (De George, 2011). Any business organsiation not only generates the
employment to the area but also delivers a products or services to the external environment
which is something productive in nature and contributes at some part to the GDP of the nation.
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On the subsequent shut-down of the industry the business as well as the complete financial &
non-financial environment is greatly impacted.
Part E
The main feature that makes the above decision unethical generally is as follows:
Economic disturbance in the life of the general public which is working as workforce in the
manufacturing unit that was shut down by the company is the main feature that would make the
decision unethical. The organization should attain sustainable growth which means that it should
grow along with the social group present surrounding the company. The sustainable growth
cannot be achieved if these workforce are unemployed by the organization and it will be
impossible to shift the whole workforce from one place to other place where the new plan is
being set up by the company.
References
Charts, Market capitalization of Telstra corporation, Viewed on 25th Aug 2017, Retrieved from
https://ycharts.com/companies/TLSYY/market_cap
Crane, A., & Matten, D. (2016). Business ethics: Managing corporate citizenship and
sustainability in the age of globalization. Oxford University Press.
De George, R. T. (2011). Business ethics. Pearson Education India.
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