ACC00716 Finance Assessment 2: Business Case Studies - Session 1, 2020

This finance assignment, completed for ACC00716, comprises a comprehensive analysis of financial concepts. The assignment is divided into three main parts: time value of money and bond valuation, and risk and return analysis. The first section involves calculations related to borrowing, annual ...Read More

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Finance

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Table of Contents
1..................................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................3
c).............................................................................................................................................3
d)............................................................................................................................................4
e).............................................................................................................................................4
f).............................................................................................................................................5
Question 2..................................................................................................................................5
a) & b)....................................................................................................................................5
Question 3..................................................................................................................................6
a).............................................................................................................................................6
References..................................................................................................................................8
Appendix....................................................................................................................................9

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1.
a)
The borrowing is made in the company and for that, there is the installment that is paid
amounting to $15897. The calculation for the same is made and that is presented below:
a) calculation of the amount of
borrowing
Particulars Amount
Installment amount 15897
Interest rate 0.5
Period 60
The present value of
borrowings
822281.24
The total amount of the borrowing which is made by the company is for $822281.24 which is
paid in installments in the coming five years.
b)
The current sale of the company is identified at $2234.1 which is increasing in a continuous
manner every year. By considering the increment the sale which will be available after five
years is shown hereunder:
b) Calculation of annual
revenue in five years
Particulars Amount
Annual revenue 2234.1
Annual growth rate 8.10%
Time period 5
Future value
multiplier
1.476
Sales in 5 years 3297.85

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c)
On the loan, there is the need to calculate the effective annual rate which will be representing
the total cost in relation to the loan. It is required to take further decisions and so the
calculation is made.
c) Calculation of EAR
Particulars APR Period EAR
Loan A 2.48% 4 2.50%
Loan B 2.45% 365 2.48%
Loan C 2.52% 2 2.54%
The effective rate is calculated and it can be noted that it is least for loan B at 2.48% and so
this will be selected by the company to incur the minimum cost.
d)
The loan in relation to the property is taken and that will be paid in the equal installment in
the coming period. For this, the payment which will be made at each period is to be identified
and the same is done to gain a better understanding.
d) Calculation of loan
installment
Particulars Amount
Loan amount 9950000
Period 40
Rate 2.1
Semi-Annual
payment
370138.84
e)
The bonds involve maturity after a certain period and there is a yield which is made till
maturity. The same is to be identified after considering the coupon rate and current price.
e) Calculation of bond YTM
Particulars Amount
Face value 1000
Maturity 6
Coupon rate 3.95%
Current price 1050.5
Interest 39.5

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YTM 3.02%
f)
The market price of the bond is required to be calculated so that the present value of the bond
in the market can be identified. The calculation is made and in that, all the various aspects are
covered.
f) calculation of the market
price of a bond
Particulars Amount
Face value 100
Coupon rate 5%
Maturity 4
Required rate 4.80%
Interest 2.5
Market value -100.72
The market value of the bond has been calculated and it is determined to be $100.72.
Question 2
a) & b)
In the market, there are various stocks that are involved and the return in relation to them
shall be ascertained. The CAPM model is used and with that, the calculation is made to
ascertain the expected return. The portfolio is considered and for that risk and return both are
calculated which will help in taking the required decisions (Capitaliq, 2020).
Particulars HVN Hypothetical
company
Risk free rate (Rf) 0.68 0.68
Market risk premium
(Rp)
5.5 5.5
Beta (b) 0.62 1.6
CAPM Rf + b* Rp
Expected return 4.09 9.48
weights 0.7 0.3
Portfolio return 5.71
Portfolio beta 0.91

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Question 3
a)
In the management of the stock, there are various aspects that are required to be considered
before making the investment. They all shall be considered by the company also so that they
can take the decisions accordingly and will manage the stock in the required manner. Both
the return and risk are the main factors to be considered and they are related to one another.
In the market, there is huge chaos that is involved and with that, the investors are not able to
have certain results (İmrohoroğlu and Tüzel, 2014). In order to deal with this, the analysis has
been made for Harvey Norman (HVN) and with this, a hypothetical company is also
considered which will help in making the proper comparison. There is the consideration of
the capital asset pricing model in the same for the determination of the expected returns
which will be available on the stocks. The risk-free return which is taken is a very low level
and this decline has been due to the various changes in the economy. There is the spread of
coronavirus which has affected the complete economy and by that performance of the
companies is also affected.
For the undertaking of the decision, there will be a need for both the return and beta. There is
the consideration of the portfolio and for that, the weights have been estimated (Jeffrey,
Lévesque and Maxwell, 2016). It has been considered that there will be a higher investment
in HVN of about 70% and the remaining 30% is invested in the hypothetical company. The
return for the portfolio is calculated with the help of the returns which have been identified by
using CAPM. The weights are considered and with that respective returns are taken into
account. The return which will be made on the portfolio is coming to be 5.71%. The rate is
higher than the market risk premium which is involved and that shows the company will be
managing the stocks in an effective manner.
The risk is an important aspect and for that beta is calculated as it represents the risk that is
involved with the stocks and portfolio. In all the shares there is the involvement of
unsystematic and systematic risk. The volatility for the investors is to be reduced and for that,
they are just exposed to the unsystematic risk which is involved (Sohrabi, 2017). The
systematic risk is the part of the risk that will be involved and cannot be avoided in all the
stocks. The individual risk of the stock can be measured with the help of the beta which
represents the systematic risk.

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The decision is taken on the basis of the beta which is derived. In this, the beta higher than 1
shows the stock to be more volatile and aggressive and if the same is less than 1 then the
stocks are less volatile and will be considered as defensive. The zero betas are also involved
and it shows that the stock will not be affected by the changes which will be taking place in
the market (Kelly, Pruitt and Su, 2019). Due to this reason, it is important the risk is
calculated so that the expected movement of the stock in consideration with market change
can be estimated. This will be helping the investors in identifying the risk which is involved
with the investment and they will be able to take the decision in such a manner that the higher
risk can be eliminated.
The beta is considered to be 1.6 for the hypothetical company and this will be a risk for the
investors as it is highly volatile than the market. The return which is made in this case is also
higher at 9.48%. On the other hand, the beta of HVN is low to 0.62 and that shows there is
less risk which is involved and the stock will be defensive in the market (Capitaliq, 2020).
The lower risk is a positive aspect but with that, the return is also less at 4.09% which is
lower than the market risk premium of 5.50%.
The portfolio theory is considered and it states that the portfolio shall be diversified as with
that the unsystematic risk can be eliminated. For the evaluation of the portfolio, there is the
return and risk both are considered. It has been noted that the HVN is having a weight of 70%
and there is a lower rate of return which is made by this whereas the other company is
making the higher return but is having the 30% share only. The risk which is involved with
HVN is also less in comparison to the other company which is having a beta of 1.60. The
portfolio return is ascertained and that is identified to be 5.71% and with this, the beta of the
portfolio is also calculated at 0.91. This shows the systematic risk which is involved. It is
lower than the market risk and also the value is below 1 which shows that there will be
defensive nature involved (Theodossiou and Savva, 2016). The weighted average return is
calculated and that is adequate in respect of the risk which is involved with the portfolio. All
of these aspects will be considered by the investors and then the decisions will be undertaken
accordingly.

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References
Capitaliq. (2020) Australia Government Debt Interest Rate Profile. [Online] Available at:
https://www.capitaliq.com/CIQDotNet/MacroEconomics/InterestRate.aspx?
companyId=50027527 [Accessed 9 April 2020]
Capitaliq. (2020) Harvey Norman Holdings Limited (ASX:HVN) Public Company Profile.
[Online] Available at: https://www.capitaliq.com/CIQDotNet/company.aspx?
companyId=6478902 [Accessed 9 April 2020]
İmrohoroğlu, A. and Tüzel, Ş. (2014) Firm-level productivity, risk, and return. Management
Science, 60(8), pp.2073-2090.
Jeffrey, S.A., Lévesque, M. and Maxwell, A.L. (2016) The non-compensatory relationship
between risk and return in business angel investment decision making. Venture
Capital, 18(3), pp.189-209.
Kelly, B.T., Pruitt, S. and Su, Y. (2019) Characteristics are covariances: A unified model of
risk and return. Journal of Financial Economics, 134(3), pp.501-524.
Sohrabi, M. (2017) The Relationship between Non-Financial Innovative Management
Accounting Tools and Risk and Return of Iranian Stock Market Listed Companies. Dutch
Journal of Finance and Management, 1(2), p.40.
Theodossiou, P. and Savva, C.S. (2016) Skewness and the relation between risk and
return. Management Science, 62(6), pp.1598-1609.

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Appendix

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