TMA Solution: FIN303 Financial Management Assignment - October 2018

This assignment solution for FIN303 Financial Management addresses a 30-year loan scenario, calculating interest payments, total interest paid, and the present value of loan payments. It explores weighted average cost of capital (WACC), discount rates, and cash flow analysis for a project, including net present value (NPV) calculations. The assignment also analyzes capital structure, share buybacks, and dividend payments under different scenarios, referencing the Modigliani-Miller theory. The solution provides detailed computations and interpretations, covering various aspects of financial management, such as loan amortization, project valuation, and capital structure decisions.

FIN 303 FINANCIAL MANAGEMENT ASSIGNMENT
ANSWER 1
Part A (i)
The amount of interest that shall be paid in the first month of the twenty fifth year is $
705.6246.
The computation has been done by using IPIM formula in excel.
Sl No Particulars Amount ($)
1 Loan amount 800000
2 Tenure 30 years
3 Saving Interest Rate 1.20%
4 Loan Interest rate 3.60%
5 Monthly EMI 3637.16
6 Total Amount of Emi 1309378.61
7 Interest 509378.61
8 Computation of interest at the beginning of 25th Year 705.62
Part A (ii)
The interest component of EMI over the life of the loan has been computed at $509378.61.
(For Computation refer Above)
Part B
On perusal of the details presented in excel along with amortisation schedule for cross
verification, it can be seen that under the proposed loan arrangement, the principal
component is $ 800,000 and interest computed on the principal over 360 months i.e. tenure of
the project is $5,09,378. The interest component represent approximately 60% of principal
and has been generated over the years. It shall also be pertinent to note that for repayment of
loan, the amount initially is set against the principal and then against the interest, as result the
same piled upto 60% over a period of 30 years. In addition, the interest amount is higher
under the initial stage of loan and the same decreases as the loan maturity approaches.
The following assumptions have been undertaken while computation:
(a) There has been no prepayment of loan;
(b) There has been no intention to set off the loan earlier;
(c) There has been no change in rate of interest;
(d) There is no default of loan
Part C
The answer to the question of Present value of loan by discounting @1.2 % compounded
monthly is $ 1,09,9143.923. (Refer Appendix-1)
Part D

On perusal of the computation in Excel, it shall be seen that the present value of loan when
discounted @1.2% is greater than the initial amount of principal lent under the agreement.
Further, the method is based on time value of money and the difference arise on account of
different in rate of interest used. In addition, the rate of discount used for the purpose of
computation of present value is risk free interest rate as interest on savings is nearly
equivalent to risk free interest. Also, the discounted EMI includes both interest and principal.
The difference between the principal actually granted initially and the computed value of
present loan by discounting @1.2% $ 2,99,143.9229. The same implies that I am paying extra
amount to lender on account of risk that has been borne by him by giving me loan. The
amount that has been awarded to lender on account of extra risk borne by him stands at $
2,99,143.9229
Thus, in short the rationale for difference in interest rate and difference in principal computed
and the principal actually is isk undertaken by the person lending the money.
Question 2
Part A (i)
The computation of WACC is presented here-in-below:
Weighted Average Cost of capital
Sl NO Particular Cost
1 Cost of Debt 8%
2 Cost of Debt post tax 6.4%
3 Risk Free rate 5%
4 Market return 15%
5 Risk Premium 10%
6 Beta 1.20
7 Cost of Equity 17.00%
8 Weight of Debt 3.00
9 Weight of Equity 6
10 Weight of Debt 3
11 WACC 13.47%
Computation of beta
Sl NO Particular Cost
1 Beta Levered 1.2
2 Beta Unlevered 0.857142857
3 Beta of Proposed project 1.2
It shall be pertinent to note that for deriving the cost of equity of the tested company only Bad
Inc. Beta has been taken as the company activities are similar to the tested company.
Accordingly, the cost of equity stands at 13.47%.
Part A (ii)

The discount rate which has been used for the purpose of analysing the project is 13.47%.
The rationale for using the said rate as it encompasses the desired rate of return by the
financers of the project i.e. cost and equity. Further, the rate specifies the minimum rate
below which the company should not accept the project. (CFI Education Inc., 2018)
In addition, it has been assumed that MM approach holds good, hence even if the capital
structure changes the cost of capital shall remain constant at 13.47%. Besides, the above
stated rate represent the desired rate of return by equity and debt shareholders and serve as
hurdle rate for the said project.
Part B (i)
The details of the cash flow for first five years of the project has been provided here-in-under:
Sl
No Particular
year
0
year
1
year
2
year
3 year 4 year 5
Terminal
Value
1 Revenue 800 960 1152 1382.4 1658.88
2
Annual Working Cost
(Variable) -240 -288
-
345.6
-
414.72
-
497.664
3 Fixed Cost -80 -80 -80 -80 -80
4 Depreciation -120 -120 -120 -120 -120
5 EBIT (1-2-3-4) 360 472 606.4 767.68 961.216
6 Tax (5*20%) -72
-
94.4
-
121.2
8
-
153.53
6
-
192.243
2
7 EBI (5-6) 288
377.
6
485.1
2
614.14
4
768.972
8
8 Depreciation 120 120 120 120 120
9 OCF 408
497.
6
605.1
2
734.14
4
888.972
8
Part B(ii)
The details of change in working capital has been provided in the solution above
Sl
No Particular
year
0
year
1
year
2
year
3
year
4 year 5
Terminal
Value
1 Net Working Capital Level 80 96
115.
2
138.
24
165.8
88
2 Change in Net Working Capital 80 16 19.2
23.0
4
27.64
8
3
Net Cash flow from sale of
Asset 240
4
Realisation of Net working
capital at end 165.888
Part B(iii)

Sl
No Particular year 0 year 1 year 2 year 3 year 4 year 5
Terminal
Value
1
Infrastructural
Investment -600
2 Depreciation -120 -120 -120 -120 -120
3 Salvage Value 240
4 Revenue 800 960 1152
1382.
4 1658.88
5 Annual Working Cost -240 -288 -345.6
-
414.7
2 -497.664
6 Working Capital -80 -16 -19.2 -23.04 -27.64 165.88
7 Fixed Cost -80 -80 -80 -80 -80
8 Net Cash Flow 280 456 587.2
744.6
4 933.576 405.88
9 Tax -72 -94.4
-
121.2
8
-
153.5
36
-
192.243
2
10 Cash Flow after Tax 208 361.6
465.9
2
591.1
04
741.332
8 405.88
11 Depreciation 120 120 120 120 120
12
Cash Flow after Tax &
Depreciation 328 481.6
585.9
2
711.1
04
861.332
8 405.88
13 Discounting factor 1
0.881
316
0.776
718
0.684
534
0.603
291
0.53169
003
0.531690
03
14
Present Value of Cash
flows -600
289.0
717
374.0
674
401.0
822
429.0
026
457.962
0621
215.8023
493
15 Net Present Value
1566.
988
Assumption
(a) Fees paid in Annual instalment is sunk cost
(b) Changes in Working Capital is realised at end
Part B(iv)
On the basis of above computation, the project shall be accepted as the Net present value
computed stands at $1567.651at a discounting rate of 13.47 %. Since Net Present Value is
positive, project shall be accepted.
Question 3
PART A (i)
Sl No Particulars Quantity Rate Amount
1 Share 5000 60 300000
2 10 Year Bond 150 1000 150000
3 Buy Back Shares 2500 60 150000

4 Cost of Debt before Tax 6%
5 Earnings Before Interest and Tax 28000
6 Tax Rate NiL
7 Profit after Taxt 28000
8 Dividend Per Share 5.6
9 Dividend received by Maureen 100 5.6 560 Answer (a(i))
PART A (ii)
Sl No Particulars Quantity Rate Amount
1 Share 5000 60 300000
2 10 Year Bond 150 1000 150000
3 Buy Back Shares 2500 60 150000
4 Cost of Debt before Tax 6%
5 Earnings Before Interest and Tax 28000
6 Tax Rate NiL
7 Profit after Tax 28000
8 Dividend Per Share 5.6
9 Dividend received by Maureen 100 5.6 560
10 Buy Back Shares 2500 60 150000 Answer (a(ii))
PART A (iii)
Sl No Particulars Quantity Rate Amount
1 Share 5000 60 300000
2 10 Year Bond 150 1000 150000
3 Buy Back Shares 2500 60 150000
4 Cost of Debt before Tax 6%
5 Earnings Before Interest and Tax 28000
6 Tax Rate NiL
7 Profit after Tax 28000
8 Dividend Per Share 5.6
9 Dividend received by Maureen 100 5.6 560
10 Buy Back Shares 2500 60 150000
11 Earnings Before Interest and Tax 28000
12 Interest 9000
13 Profit after Tax 19000
14 Dividend per share 7.6
15 Dividend received by Maureen 100 7.6 760 Answer (a(iii))
PART A (iv)
Sl No Particulars Amount
1 No of shares under existing Capital Structure 100
2 Proportion of debt in the capital structure of the company 50%
3 Total Capital of Maureen 6000

4 Total value of shares to be sold 3000
5 Total debt to be let out 3000
6 Receipt of dividend 380
7 Interest 180
8 Total Receipt 560
PART A (v)
As per Modigliani Miller theory, it is irrelevant to analyse the capital structure as the same
does not contribute to the value of the company rather the same is derived by the net
operating cash flow of the company. However, under such thesis there is no transaction cost
and taxes. The assumption behind the same proposition is that there are no taxes and
transaction cost for raising finance. However, the above proposition does not hold true when
the aforesaid assumptions are violated. In such a scenario, MM has proposed that the value of
the company shall be increased by the present value of tax savings on account of interest on
debt.
In addition the theory holds that WACC of the company remains consistent and addition of
debt in the company capital structure increased cost of equity.
PART B (i,ii &iii)
Sl No Particulars Quantity Rate Amount
1 Share 5000 60 300000
2 10 Year Bond 150 1000 150000
3 Buy Back Shares 2500 60 150000
4 Cost of Debt before Tax 6%
5 Earnings Before Interest and Tax 28000
6 Tax Rate 20%
7 Profit after Tax 22400
8 Dividend Per Share 4.48
9 Dividend received by Maureen 100 4.48 448
10 Buy Back Shares 2500 60 150000
11 Earnings Before Interest and Tax 28000
12 Interest 9000
13 Profit after Tax 15200
14 Dividend per share 6.08
15 Dividend received by Maureen 100 6.08 608
PART B (iv)
Sl No Particulars Amount
1 No of shares under existing Capital Structure 100
2 Proportion of debt in the capital structure of the company 50%
3 Total Capital of Maureen 6000
4 Total value of shares to be sold 3000
5 Total debt to be let out 3000

6 Receipt of dividend 304
7 Interest 180
8 Total Receipt 484
PART B (v)
As per Modigliani Miller theory, it is irrelevant to analyse the capital structure as the same
does not contribute to the value of the company rather the same is derived by the net
operating cash flow of the company. However, under such thesis there is no transaction cost
and taxes. The assumption behind the same proposition is that there are no taxes and
transaction cost for raising finance. However, the above proposition does not hold true when
the aforesaid assumptions are violated. In such a scenario, MM has proposed that the value of
the company shall be increased by the present value of tax savings on account of interest on
debt.
In addition the theory holds that WACC of the company remains consistent and addition of
debt in the company capital structure increased cost of equity.
(Study.com, 2018)
References:
CFI Education Inc. (2018). WACC. Retrieved October 3, 2018, from corporatefinanceinstitute.com:
https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-wacc-formula/
Study.com. (2018). The Modigliani-Miller Theorem: Definition, Formula & Examples. Retrieved
October 3, 2018, from Study.com: https://study.com/academy/lesson/the-modigliani-miller-
theorem-definition-formula-examples.html

Appendix-1
Sl No Particulars Principal Interest EMI Closing
Discounting
Factor
Present
Value
1 Loan Amount 800000 2400
3637.1
6
798762.8
4 0.999001 3633.529273
2 Loan Amount
798762.8
4
2396.28
9
3637.1
6
797521.9
6 0.998003 3629.899373
3 Loan Amount
797521.9
6
2392.56
6
3637.1
6
796277.3
7 0.997006 3626.2731
4 Loan Amount
796277.3
7
2388.83
2
3637.1
6
795029.0
4 0.996010 3622.65045
5 Loan Amount
795029.0
4
2385.08
7
3637.1
6
793776.9
6 0.995015 3619.031418
6 Loan Amount
793776.9
6
2381.33
1
3637.1
6
792521.1
3 0.994021 3615.416002
7 Loan Amount
792521.1
3
2377.56
3
3637.1
6
791261.5
3 0.993028 3611.804198
8 Loan Amount
791261.5
3
2373.78
5
3637.1
6
789998.1
5 0.992036 3608.196002
9 Loan Amount
789998.1
5
2369.99
4
3637.1
6
788730.9
8 0.991045 3604.591411
10 Loan Amount
788730.9
8
2366.19
3
3637.1
6
787460.0
1 0.990055 3600.99042
11 Loan Amount
787460.0
1 2362.38
3637.1
6
786185.2
3 0.989066 3597.393027
12 Loan Amount
786185.2
3
2358.55
6
3637.1
6
784906.6
2 0.988078 3593.799228
13 Loan Amount
784906.6
2 2354.72
3637.1
6
783624.1
8 0.987091 3590.209019
14 Loan Amount 783624.1 2350.87 3637.1 782337.8 0.986104 3586.622396

Sl No Particulars Principal Interest EMI Closing
Discounting
Factor
Present
Value
8 3 6 9
15 Loan Amount
782337.8
9
2347.01
4
3637.1
6
781047.7
4 0.985119 3583.039357
16 Loan Amount
781047.7
4
2343.14
3
3637.1
6
779753.7
2 0.984135 3579.459897
17 Loan Amount
779753.7
2
2339.26
1
3637.1
6
778455.8
2 0.983152 3575.884013
18 Loan Amount
778455.8
2
2335.36
7
3637.1
6
777154.0
2 0.982170 3572.311702
19 Loan Amount
777154.0
2
2331.46
2
3637.1
6
775848.3
2 0.981189 3568.742959
20 Loan Amount
775848.3
2
2327.54
5
3637.1
6
774538.7
0 0.980208 3565.177781
21 Loan Amount
774538.7
0
2323.61
6
3637.1
6
773225.1
6 0.979229 3561.616165
22 Loan Amount
773225.1
6
2319.67
5
3637.1
6
771907.6
7 0.978251 3558.058107
23 Loan Amount
771907.6
7
2315.72
3
3637.1
6
770586.2
3 0.977274 3554.503603
24 Loan Amount
770586.2
3
2311.75
9
3637.1
6
769260.8
3 0.976297 3550.95265
25 Loan Amount
769260.8
3
2307.78
2
3637.1
6
767931.4
5 0.975322 3547.405245
26 Loan Amount
767931.4
5
2303.79
4
3637.1
6
766598.0
8 0.974348 3543.861384
27 Loan Amount
766598.0
8
2299.79
4
3637.1
6
765260.7
1 0.973374 3540.321063
28 Loan Amount
765260.7
1
2295.78
2
3637.1
6
763919.3
3 0.972402 3536.784278
29 Loan Amount 763919.3 2291.75 3637.1 762573.9 0.971431 3533.251027

Sl No Particulars Principal Interest EMI Closing
Discounting
Factor
Present
Value
3 8 6 2
30 Loan Amount
762573.9
2
2287.72
2
3637.1
6
761224.4
8 0.970460 3529.721306
31 Loan Amount
761224.4
8
2283.67
3
3637.1
6
759870.9
9 0.969491 3526.195111
32 Loan Amount
759870.9
9
2279.61
3
3637.1
6
758513.4
4 0.968522 3522.672438
33 Loan Amount
758513.4
4 2275.54
3637.1
6
757151.8
2 0.967555 3519.153285
34 Loan Amount
757151.8
2
2271.45
5
3637.1
6
755786.1
1 0.966588 3515.637647
35 Loan Amount
755786.1
1
2267.35
8
3637.1
6
754416.3
1 0.965622 3512.125522
36 Loan Amount
754416.3
1
2263.24
9
3637.1
6
753042.4
0 0.964658 3508.616905
37 Loan Amount
753042.4
0
2259.12
7
3637.1
6
751664.3
6 0.963694 3505.111793
38 Loan Amount
751664.3
6
2254.99
3
3637.1
6
750282.1
9 0.962731 3501.610183
39 Loan Amount
750282.1
9
2250.84
7
3637.1
6
748895.8
7 0.961769 3498.112071
40 Loan Amount
748895.8
7
2246.68
8
3637.1
6
747505.4
0 0.960809 3494.617454
41 Loan Amount
747505.4
0
2242.51
6
3637.1
6
746110.7
5 0.959849 3491.126327
42 Loan Amount
746110.7
5
2238.33
2
3637.1
6
744711.9
2 0.958890 3487.638689
43 Loan Amount
744711.9
2
2234.13
6
3637.1
6
743308.8
9 0.957932 3484.154534
44 Loan Amount 743308.8 2229.92 3637.1 741901.6 0.956975 3480.67386

Sl No Particulars Principal Interest EMI Closing
Discounting
Factor
Present
Value
9 7 6 6
45 Loan Amount
741901.6
6
2225.70
5
3637.1
6
740490.2
0 0.956019 3477.196663
46 Loan Amount
740490.2
0
2221.47
1
3637.1
6
739074.5
1 0.955064 3473.722941
47 Loan Amount
739074.5
1
2217.22
4
3637.1
6
737654.5
7 0.954110 3470.252688
48 Loan Amount
737654.5
7
2212.96
4
3637.1
6
736230.3
7 0.953157 3466.785902
49 Loan Amount
736230.3
7
2208.69
1
3637.1
6
734801.9
0 0.952204 3463.322579
50 Loan Amount
734801.9
0
2204.40
6
3637.1
6
733369.1
4 0.951253 3459.862717
51 Loan Amount
733369.1
4
2200.10
7
3637.1
6
731932.0
9 0.950303 3456.40631
52 Loan Amount
731932.0
9
2195.79
6
3637.1
6
730490.7
2 0.949354 3452.953357
53 Loan Amount
730490.7
2
2191.47
2
3637.1
6
729045.0
3 0.948405 3449.503853
54 Loan Amount
729045.0
3
2187.13
5
3637.1
6
727595.0
0 0.947458 3446.057795
55 Loan Amount
727595.0
0
2182.78
5
3637.1
6
726140.6
2 0.946511 3442.61518
56 Loan Amount
726140.6
2
2178.42
2
3637.1
6
724681.8
8 0.945566 3439.176004
57 Loan Amount
724681.8
8
2174.04
6
3637.1
6
723218.7
6 0.944621 3435.740264
58 Loan Amount
723218.7
6
2169.65
6
3637.1
6
721751.2
6 0.943677 3432.307956
59 Loan Amount 721751.2 2165.25 3637.1 720279.3 0.942735 3428.879077