Corporate Finance Assignment: Detailed Solutions and Analysis

This document presents a comprehensive solution to a corporate finance assignment. It begins with calculations related to retirement planning, determining the required initial investment and monthly savings needed to achieve a desired retirement income. The solution then delves into annuity valuation, calculating its worth at different points in time. Further, it explains the concept of perpetuity and how its value changes. The assignment also differentiates between systematic and unsystematic risk, highlighting their impact on diversification. It explores diminishing marginal utility and its implications, and finally, explains supply and demand equilibrium and the consequences of deviations from it. The document provides detailed answers, calculations, and explanations for each question, offering a thorough understanding of the core concepts in corporate finance.

Running head: CORPORATE FINANCE ASSIGNMENT
Corporate Finance Assignment
Name of the Student
Name of the University
Author Note:

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Corporate Finance Assignment
Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................2
Answer to Question 3......................................................................................................................3
Answer to Question 4......................................................................................................................4
Answer to Question 5......................................................................................................................5
Answer to Question 6......................................................................................................................5
Answer to Question 7......................................................................................................................6
References........................................................................................................................................9

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Corporate Finance Assignment
Answer to Question 1
Calculation of Amount
Monthly Income 8000
Rate of Return 0.583%
Time (months) 360
Amount
($1,202,460.5
)
a) In order to withdraw the required fund of $8000 per month at the time of retirement and
during the tenure of 30 years of retirement, an amount of $1,202,460.5 is required to be
earned now.
Remaining years for retirement 35
Total months 420
Monthly Savings required ($2,863.0)
b) In monthly saving required to be made now until 35 years to achieve the desired amount
at the time of retirement is $2,863 per month.
Answer to Question 2

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Corporate Finance Assignment
The annuity is the security that an investor will receive as a series of payment in the future
(Collins, 2016). The investor might receive the payment immediately if the large sum is invested
today.
A) The value of annuity worth after 5 years from now is calculated based on the present
value derived from the annuity 9 years from now using the same compounding rates but
the remaining months is reduced to 16 (4*4).
B) The value of annuity now is calculated on the basis of the present value of the six-year
annuity worth 9 years from now using the same rate, but the months are considered as
36(4*9).
Answer to Question 3
Perpetuity is a regular stream of identical cash flows having no end, as it is a security that
will continue forever with equal spaced and equal cash flows (Parameswaran, 2019). Perpetuity,
in valuation analysis, is used to find the terminal value and the present value of the company’s

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Corporate Finance Assignment
cash flow stream. The value of the perpetuity will not change after the cash flow has begun
because fixed coupon payments are made on the everlasting investment which is irredeemable,
hypothetically and therefore there is no present value on the principal (Smit, 2016). However,
changes in the discounting rates before the cash flow begins can change the value of the
perpetuity (Brown & Scholz, 2019).
Answer to Question 4
The risk is inevitable in financial decisions which include investments in assets like share
or debenture or equipment (Shapiro & Hanouna, 2019). These risks are usually of two types
systematic risk and unsystematic risk. Systematic risk is those risk which cannot be controlled
and are occurred as a result of some external factors which are not industry or security specific
and affects the entire market. However, unsystematic risk are those risk which is related to a
particular company, security or industry and can be controlled. Some more difference between
the systematic risk and unsystematic risk are as follows (Zreik & Louhichi, 2017):
 The systematic risk are uncontrollable as it occurs due to some factors which are external
to the company, while the unsystematic risk are controllable, and it occurs due to some
factors which are internal to the company.
 Systematic risk can be due to interest risk, market risk or purchasing power risk, while
the unsystematic risk is due to financial or business risk.
 The systematic risk is protected by asset allocation, while the unsystematic risk can be
protected by diversifying the portfolio.
 The systematic risk is inescapable, while unsystematic risk can be evaded.

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Corporate Finance Assignment
The unsystematic risk can be mitigated or eliminated by diversifying the portfolio (Biswas,
2015). On the other hand, systematic risk cannot be mitigated by portfolio diversification,
however, it can be substantially controlled by the techniques of hedging and asset allocation.
Answer to Question 5
The law of diminishing marginal utility asserts that everything else remains equal as the
consumption of a commodity increases the marginal utility derived from each additional
commodity decreases (Frank, 2015). Marginal utility is the utility derived from the consumption
of an additional unit of product. Hence the willingness of the consumer to pay for consuming the
product for the first time will be higher when compared to the desire to pay for consuming the
same product again and again.
Answer to Question 6
The market equilibrium is attained when the total quantity demanded by the consumers
corresponds the total quantity supplied by the suppliers. When the market is in equilibrium the
price of the commodities tends to remain the same. However, changes from either the demand
side or the supply side will change the point of equilibrium along with the change in price and
quantity.

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Corporate Finance Assignment
If the departure from the point equilibrium is from the demand side, considering the
supply remaining unchanged, then a rightward shift in the demand curve indicates an rise in the
demand which causes equilibrium to increase resulting in rising in the price of the product, while
a leftward shift in the demand curve indicates a reduction in demand and hence causes the
equilibrium to decrease and a fall in the price of the commodity. Consequently, if the departure
of the point is from supply side, considering the demand to be unchanged, then a rightward shift
in the supply curve means an increase or surplus in the supply causes price and equilibrium to
decrease, wh ile a leftward shift in the supply curve means a decline in supply or shortage and
hence causes equilibrium and price to increase (Grossman, 2017).
Answer to Question 7.

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Corporate Finance Assignment

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Corporate Finance Assignment

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Corporate Finance Assignment
References
Biswas, D. (2015). The effect of portfolio diversification theory: Study on modern portfolio
theory of stock investment in the national stock exchange. Journal of Commerce and
Management Thought, 6(3), 445-455.
Brown, D., & Scholz, D. (2019). Discount rates and asset returns: Implications for endowment
strategies. Available at SSRN 3426197.
Collins, P. J. (2016). Annuities and Retirement Income Planning. CFA Institute Research
Foundation.
Frank, C. R. (2015). Production Theory and Indivisible Commodities.(PSME-3) (Vol. 3).
Princeton University Press.
Grossman, M. (2017). The demand for health: a theoretical and empirical investigation.
Columbia University Press.
Parameswaran, S. K. (2019). Fixed Income Securities: Concepts and Applications. Walter de
Gruyter GmbH & Co KG.
Shapiro, A. C., & Hanouna, P. (2019). Multinational financial management. Wiley.
Smit, T. O. (2016). Designing a corporate bond (Master's thesis, University of Twente).
Zreik, O., & Louhichi, W. (2017). Risk Disclosure and Company Unsystematic, Systematic, and
Total Risks. Economics Bulletin, 37(1), 448-467.