Corporate Finance Assignment: Project Analysis and Stock Evaluation

This assignment solution addresses key concepts in corporate finance, providing detailed calculations and explanations for various scenarios. Part A focuses on calculating the present value of an annuity. Part B analyzes bond valuation under simple and compound interest. Part C determines the weighted average cost of capital (WACC). Question 2 evaluates project feasibility using Net Present Value (NPV) and Internal Rate of Return (IRR), including a comparison of mutually exclusive projects. Finally, Question 3 discusses stock valuation techniques, comparing intrinsic and market values, and contrasting fundamental and technical analysis. The solution references key finance textbooks to support its analysis, offering a comprehensive understanding of corporate finance principles and their application in real-world scenarios.

CORPORATE FINANCE
STUDENT ID:
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Question 1
PART A
For finding the annuity present value, the following formula can be deployed (Damodaran,
2015).
Taking into consideration the information provided, the following inputs are evident.
P = $3,600, r= 12% p.a. or 1% per month, n = 2 years or 24 months
Substituting the above inputs in the formula stated above, we get present value of annuity =
3600*(1-1.01-24)/0.01 = $ 76,476.19
PART B
The information provided in regards to the bonds is summarised as shown below.
a) With regards to simple interest, the interest does not alter and remains the same.
As a result, interest that the company would pay over a 12 year period = 10000*(10/100)*12
= $ 12,000
b) In the given case, the interest is compounded and hence the quantum of the same would
increase on an annual basis. The total interested paid by the company on the bonds over a 12
year period would be equal to the FV (Future Value) of annuity of $ 1,000 payments at the
end of 12 years. The appropriate formula is listed below.

The relevant inputs for the above formula are as follows.
P = $1,000, r=10%, n =12,
PART C
Equity (Market value) = $46.6 million
Long term debt (Market value) = $35 million
Preference shares (Market value) = $ 10.3 million
Deployed capital = 46.6 + 35 + 10.3 = $ 91.9 million
Equity weight = (46.6/91.9) = 0.507
Long term debt weight = (35/91.9) = 0.381
Preference shares weight = (10.3/91.9) = 0.112
Equity cost = 12% p.a.
Long Term cost (post-tax) = 8%*(1-0.3) = 5.6% p.a
Preference shares cost = 10%
Question 2
a) For determining the feasibility of Project A, we need to compute the NPV (Net Present
Value) of this project by considering the 20% required return on the investment.

It is apparent from the computation above that project A NPV is positive which would imply
that I would execute the given project.
b) For determining the feasibility of Project B, we need to compute the NPV (Net Present
Value) of this project by considering the 25% required return on the investment. The benefit
from the project would be reaped in terms of reduced cash outflow as annual savings to the
extent of $ 4,200 in labour cost.
The present value of all these savings over the useful life of the project = 4200*(1-1.25-
15)/0.25 = $ 16,208.9
It is apparent from the computation above that project B NPV is positive which would imply
that I would execute the given project.
c) In case of the above projects being mutually exclusive, one of the two projects may be
selected. NPV would be used as the selection criterion to decide on the more superior
project. Comparing the results obtained with regards to the NPV of both projects, it is
apparent that Project A would be chosen owing to the higher NPV in comparison to Project B
(Petty et. al., 2015).
d) The given statement is incorrect since it is not correct to conclude that the results obtained
from IRR and NPV are always the same. A noteworthy example when the results of IRR And
NPV are different tends to take place with regards to projects which tend to have net negative
cashflow in a particular year during project life. IRR usually provides two answers for such
projects and thus deviates from the NPV results which remain unaffected (Parrino and
Kidwell, 2014).
Question 3
For determining if the underlying stock is overvalued or undervalued, it is essential that there
needs to be a comparison of the stock market value and the underlying intrinsic value that is
determined by various techniques available such as discounted cash flow. A stock is

undervalued when the intrinsic value tends to exceed the market value and is overvalued
when intrinsic value is lower than the market value. An example to demonstrate the same can
be exhibited using Woolworths stock. Assume that the intrinsic price of the stock as
determined using DCF analysis is $ 40 per share. However, the current market price is
$32.22. Since the market price is lower than the intrinsic value, hence the stock is currently
undervalued and must be purchased (Brealey, Myers and Allen, 2014).
The basic premises of technical analysis is that the stock movement in the present are a
function of their past movements and hence analysis of the historical share price movements
is done to identify the key support and resistance levels which are used to make short term
trading bets or positional trades (Petty et. al., 2015). On the other hand, the fundamental
analysis is focused on determining the intrinsic value of the stock taking into consideration all
the relevant aspects in the present and the future. Further, the decision to buy or not is based
on the comparison of the intrinsic value of share with the market value to determine if the
share is undervalued or overvalued. Typically long term trades are initiated using
fundamental analysis since the attainment of intrinsic value could take a significant amount
of time (Petty et. al., 2015).

References
Brealey, R. A., Myers, S. C. and Allen, F. (2014) Principles of corporate finance, 6th ed. New
York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. and Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French
Forest Australia