Corporate Finance Homework: Loan, Investment and Finance Analysis

This document presents a comprehensive solution to a corporate finance assignment. Part A focuses on detailed calculations related to loans, including effective annual interest rates, monthly repayments, and loan repayment timelines. It also covers investment analysis, comparing payback periods, calculating Net Present Value (NPV), Profitability Index, and Internal Rate of Return (IRR) for different investment scenarios. Furthermore, it includes the calculation of Annual Equivalent Cost (AEC) for selecting the most cost-effective option between two vans. Part B summarizes articles on various corporate finance topics, including risk and return in the Australian market, capital budgeting challenges for women entrepreneurs, capital structure and the importance of regional innovation networks, working capital management in the retail sector, and the impact of global economic divergence on international finance. The assignment provides a complete overview of financial concepts and their applications.

CORPORATE FINANCE
STUDENT ID:
[Pick the date]

PART A
Question 1
(i) Nominal interest rate = 4.5% p.a.
The interest is compounded annually
Effective Annual Rate = (1+ (4.5/1200))12 -1 = 4.594%
(ii) Principal borrowed = $ 750,000
Nominal interest rate = 4.5% p.a. or (4.5/12) = 0.375% per month
Time period = 25 years or (25*12) = 300 months
The formula for EMI is indicated as follows.
EMI = P*R *(1+R)N/((1+R)N -1)
Substituting the given information in the formula listed above, we get
EMI = 750000*0.00375*1.00375300/(1.00375300-1) = $ 4,168.74
(iii) The EMI formula listed above can be used in the given scenario.
EMI = P*R *(1+R)N/((1+R)N -1)
EMI = $ 4,400
P = $ 750,000
R = 0.375% per month
N = ?
4400 = 750000*0.00375*1.00375N/(1.00375N-1)
Solving the above, we get N = 272.361 months
It is apparent that the payment in 273rd month would be 0.361*4400 or $ 1,588.4

Thus, the total amount of months required would be 273. Hence, the time required is 22 years
9 months.
Question 2
(i) Investment P
Initial investment = $ 60,000
Inflows in first 2 years = 20000+30000 = $ 50,000
Remaining investment to be recouped = 60000 – 50000 = $ 10,000
Payback period = 2 + (10000/44000) = 2.23 years
Investment Q
Initial investment = $ 60,000
Inflows in first 2 years = 30000+30000 = $ 60,000
Payback period = 2 years
Conclusion
Investment Q would be preferred since the payback period is lower for the same.
(ii) The payback period would be different for investment P but not for Q. This is because the
cash flows are occurring at the end of the period and not evenly spread and hence the
payback period would not be in the form of decimals but whole year. Thus, the payback
period for investment P would be 3 years while it would remain the same for investment Q.
The decision regarding the preferred project also does not change.

(iii) It is known that the required return is 8%.
NPV (Investment P) = -60000 + (20000/1.08) + (30000/1.082) + (44000/1.083) = $19,167.3
NPV (Investment Q) = -60000 + (30000/1.08) + (30000/1.082) + (30000/1.083) = $ 17,312.91
(iv) Profitability Index = Present Value of future cash flows/Initial investment
Profitability Index (Investment P) = [(20000/1.08) + (30000/1.082) + (44000/1.083)]/60000 =
1.32
Profitability Index (Investment Q) = [(30000/1.08) + (30000/1.082) + (30000/1.083)]/60000 =
1.29
(v) The IRR may be defined as the discount rate for which NPV becomes zero.
IRR (Investment P)
Let x% be the IRR in the given project
60000 = (20000/(1+x)) + (30000/(1+x)2) + (44000/(1+x)3)
Solving the above, we get x =
IRR (Investment Q)
Let y% be the IRR in the given project
60000 = (30000/(1+y)) + (30000/(1+y)2) + (30000/(1+y)3)
Solving the above, we get y =
Question 3

From the above computation, it is apparent that NPV of the project is $ 21,716.
(b) Considering the positive NPV of the proposed project, hence the company should replace
the existing ferries with hydrofoils.
Question 4
For the two vans, the AEC (Annual Equivalent Cost) needs to be estimated so as to choose
the better van which would have a lower AEC. The requisite formula is indicated below.
VAN A
Asset price = $70,000
Useful life = 3 years
Annual maintenance costs = $ 7,000
Discount Rate = 6% p.a.
Hence, AEC = 70000*0.06/(1-1.06-3) + 7000 = $ 33,187.69
VAN B
Asset price = $90,000
Useful life = 4 years
Annual maintenance costs = $ 9,000
Discount Rate = 6% p.a.
Hence, AEC = 90000*0.06/(1-1.06-4) + 9000 = $ 34,973.23
Conclusion
Since AEC is lower for Van A, hence it would be preferred by the company.

PART B: Summary
(1) Risk and Return
Risk and return tend to be correlated. This is clearly highlighted with regards to Australian
businesses and also the underlying returns. The investors in Australia do not tend to assume
high amount of risk and tend to be apprehensive of volatility which is part and parcel of
equity investment. Due to lower risk, the Australian economy is not able to produce
innovative businesses which are global leaders. The situation in USA is significantly different
as compared to that in Australia where the risk taking ability of investors is giving birth to
innovative businesses which prove to be global leaders.
In order to create big businesses in the future, it is imperative to take risk in the present.
However, the Australian ecosystem is not conducive to take risk as the underlying
expectations of returns from the investors seems low coupled with limited risk appetite of the
venture capital providers owing to which high risk proposals which are quite ambitious or
innovative are rarely funded. Besides, there is the dividend imputation system whereby the
investors and the companies tend to prefer dividends ahead of growth. The net result is that
the size of the businesses remains limited. The strategy of preferring mature businesses with
stable dividends flow is not a bad strategy for capital preservation but a higher risk needs to
be assumed in long term investment where the objective is capital appreciation or to enhance
the value of capital.
(2) Capital Budgeting
The article highlights how lack of capital is a key issue for women entrepreneurs in Australia,
There is bias against extension of credit to female entrepreneurs by banks owing to which
these business owners have to approach venture capital to fulfil their capital requirement.
This is usually a more expensive avenue for raising capital since it usually involves parting
with equity stake and hence this cannot act as a financing mode indefinitely.
In a research conducted by Dell with regards to Sydney, two key issues with regards to
women entrepreneurs is access to capital and technology. It is imperative that prompt action
must be taken in this regards so that the gender divide between entrepreneurship can be
bridged. Currently, almost all of the capital funding is directed towards male entrepreneurs
which limits the role of females in regards to start new businesses. Research has also
indicated that women in leadership roles tend to perform well when flexible policies are

provided. Also, they seek entrepreneurship opportunities when access to capital is easy as it
lays the foundation to access other resources required for business.
In order to provide encouragement to women entrepreneurs, it is also imperative that the
representation of women at higher echelons and board positions needs to increase so that
there are female role models who can provide requisite inspiration and guidance to young
female entrepreneurs. The research by Dell also aims to provide city specific solutions based
on the best practices worldwide so as to minimise barriers inhibiting the growth of female
entrepreneurs.
(3) Capital Structure & Cost of Capital
The article emphasises the need for regional innovation network whereby innovation can be
fostered in regional centres and not the capital cities located on the east coast of Australia. As
pet the author, this would lead to migration of people from the capital cities to the regional
centres located in nearby cities and hence allow resolving of congestion and overcrowding
related issues which are currently being witnessed in the capital cities. In this endeavour, it is
expected that active support from Federal and state government would be required. Further, it
is essential that the regional innovation networks are linked with each other so as to facilitate
learning.
The author has also shortlisted five cities namely Wollongong, Ipswich, Newcastle, Geelong
and the Sunshine Coast which would form part of the “WINGS” innovation network. These
have been selected owing to certain factors that make these ideal locations. One of these is
that these locations are proximate to the capital cities making it easy for the entrepreneurs to
make a shift. Other favourable factors include excellent university infrastructure and growth
which make these cities suitable options to foster innovation. Additionally, currently also, the
innovation activities in these cities is quite high which make these location favourable for
future innovation. Finally, entrepreneurship is necessary in each of these cities owing to
disruption in the economy because of which a shift in the economy is required.
(4) Working Capital Management
The given article highlights the importance of working capital management with regards to
retail. It takes the example of various retailers and highlights whether there has been an
improvement or deterioration in relation to working capital management. In relation to the
inventory turnover period, it is observed that for most players there has been a deterioration

which does not auger well. This highlights the fact that businesses in Australia are finding it
difficult to manage inventory because of lack of understanding of the consumer preferences.
The inventory related problem tends to be higher for businesses that are sourcing from abroad
as a minimum quantity is required to place the order.
The health of the business tends to gauged from the working capital which is especially true
for the retail sector. This is because higher working capital would imply higher finance cost
and hence loss of competitive advantage since the player having lower working capital would
be able to provide the goods at lower cost and hence able to garner higher market share.
Further, the article also highlights the deteriorating working capital management for Dick
Smith which is having an adverse impact on the performance of the company which is
leading to increased borrowing and an adverse impact on the profitability.
(5) International Finance
The article highlights the concerns with regards to the emerging economy and the underlying
divergence that is being witnessed between the US economy and the other countries
especially the developing world. Even though the economic parameters in US is improving
and also the US dollar is appreciating but it is having an adverse impact on the currency of
other nations especially those which tend to have a limited foreign exchange owing to which
the currency fluctuations are significant.
According to BIS (Bank of International Settlements), the key aspect which needs to be
notices is that there is excess liquidity in the system despite the interest rate cycle heading
upwards in US and other developed countries. A noteworthy aspect which is of concern to the
bank is that the overall debt level in the global economy is higher than the corresponding
level at the time of the 2008 crises. This potentially is concerning in the wake of the
divergence between the US and other nations. This is worsened by the trade war between
China and US which is having adverse impact on other nations and further causing issues.
Hence, through the article the author highlights how globalisation is impacting the economies
ina divergent manner whereby one economy is recovering but it does not necessarily lead to
recovery for the other economies which essentially is dependent on a host of factors.