Risk, Return, and Financial Analysis: A Finance Assignment

This finance assignment solution provides a comprehensive analysis of various financial concepts and calculations. It includes solutions for present value calculations, revenue growth predictions, effective annual rate (EAR) computations for different loan types, and monthly payment calculations for a property loan. The document also delves into yield to maturity (YTM) calculations for bonds, and the estimation of expected returns using the Capital Asset Pricing Model (CAPM). Furthermore, it analyzes the risk and return characteristics of a portfolio, considering assets with varying levels of risk, including a hypothetical company with a negative beta. The assignment concludes with a discussion on the relationship between risk and return, and the application of financial models like CAPM in investment analysis.

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[Document subtitle]Asus
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Table of Contents
Solution –A...........................................................................................................................................2
Solution –B............................................................................................................................................3
Solution –C............................................................................................................................................4
Solution –D...........................................................................................................................................4
Solution – E...........................................................................................................................................5
Solution –F............................................................................................................................................5
Risk and Return Estimation...................................................................................................................6
Risk and Return analyses.......................................................................................................................7
References.............................................................................................................................................9
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Solution –A
Facts of the case
Boral Ltd, Enter into the large contract of sales with the consumers, where the term of
sales contract required the consumers to make payment in monthly instalments of $
2910000. But looking toward the financial condition of Boral Limited, the
management of the are looking for fund now, to make an investment. As the sales
amount is realised over a period of 4 years in monthly instalment, the Boral Ltd,
executed another contract with the bake to pay now and realisation the monthly
payment of consumers, bank agree to pay at the rate of 7 % discounting rate.
Here is a present value of amount realised from customers over a period of 4 years.
Months Payments (000) Dis Rate PV
1 $ 29.10 0.9942 $ 28.93
2 $ 29.10 0.9885 $ 28.77
3 $ 29.10 0.9828 $ 28.60
4 $ 29.10 0.9771 $ 28.43
5 $ 29.10 0.9715 $ 28.27
6 $ 29.10 0.9659 $ 28.11
7 $ 29.10 0.9603 $ 27.95
8 $ 29.10 0.9548 $ 27.78
9 $ 29.10 0.9493 $ 27.62
10 $ 29.10 0.9438 $ 27.46
11 $ 29.10 0.9384 $ 27.31
12 $ 29.10 0.9330 $ 27.15
13 $ 29.10 0.9276 $ 26.99
14 $ 29.10 0.9222 $ 26.84
15 $ 29.10 0.9169 $ 26.68
16 $ 29.10 0.9116 $ 26.53
17 $ 29.10 0.9064 $ 26.38
18 $ 29.10 0.9011 $ 26.22
19 $ 29.10 0.8959 $ 26.07
20 $ 29.10 0.8908 $ 25.92
21 $ 29.10 0.8856 $ 25.77
22 $ 29.10 0.8805 $ 25.62
23 $ 29.10 0.8755 $ 25.48
24 $ 29.10 0.8704 $ 25.33
25 $ 29.10 0.8654 $ 25.18
26 $ 29.10 0.8604 $ 25.04
27 $ 29.10 0.8554 $ 24.89
28 $ 29.10 0.8505 $ 24.75
29 $ 29.10 0.8456 $ 24.61
30 $ 29.10 0.8407 $ 24.46
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31 $ 29.10 0.8359 $ 24.32
32 $ 29.10 0.8311 $ 24.18
33 $ 29.10 0.8263 $ 24.04
34 $ 29.10 0.8215 $ 23.91
35 $ 29.10 0.8168 $ 23.77
36 $ 29.10 0.8120 $ 23.63
37 $ 29.10 0.8074 $ 23.49
38 $ 29.10 0.8027 $ 23.36
39 $ 29.10 0.7981 $ 23.22
40 $ 29.10 0.7935 $ 23.09
41 $ 29.10 0.7889 $ 22.96
42 $ 29.10 0.7844 $ 22.82
43 $ 29.10 0.7798 $ 22.69
44 $ 29.10 0.7753 $ 22.56
45 $ 29.10 0.7709 $ 22.43
46 $ 29.10 0.7664 $ 22.30
47 $ 29.10 0.7620 $ 22.17
48 $ 29.10 0.7576 $ 22.05
$ 1,396.80 $ 1,216.16
Present value of periodical instalment is $ 1216.16, hence Boral Limited will realised
$ 1216.16 as on today.
Solution –B
Predication in growth of operating revenue in 5 years
Revenue Growth End Amount
$ million 6.60% $ million
0 5731.1
1 5731.1 378.25 6109.35
2 6109.35 403.22 6512.57
3 6512.57 429.83 6942.40
4 6942.40 458.20 7400.60
5 7400.60 488.44 7889.04
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Growth in sales over a period of 5 years at the rate of 6.6 % would be $ 7889.04
(millions)
Solution –C
Type Loam Formula for EAR Computation (%)
Loan – A ( monthly ) (1+ interest )n – 1/
Compound numbers
( 1+ 0.493)12 -1 = 5.043
12
Loan- B ( Sami- annually
)
(1+ interest )n – 1/
Compound numbers
(1 +0.05)2 -1 = 5.0625
2
Loan – C ( daily ) (1+ interest )n – 1/
Compound numbers
( 1 + 0.0491)365 -1 = 5.032
365
Solution –D
Fact of the case:
Boral Limited, looking for investment in property, the projected cost of the property is
$ 574,000. As a part of financial policy of the company, company had decided to
financial the assets by borrowing the loan from bake of the company, bank is agree to
financial the property with the interest rate of 3.80 APR, with the for the term of 10
years.
For such arrangement the monthly payment of the over a 10 years are as follows.
Loan amount = $ 574000
APR = 3.80
Term = 10 years
Equal Monthly instalments is $ 5757, and Quarterly Payments would be $ 17,271.
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Solution – E
Yield to maturity on bond on approximate bases
The bond are issue for the 8 years and the current market price is $ 100.50, where the
face value of the bond are 100, with the compound interest rate is 6.15 %
C = 7.05 %
F = 100
P = 109.50
N = 8 years
YTM = C + F-P / N
F + P / 2
= $ 7.05 + 100 -109.50 / 8 years
100 + 109.50 / 2
= $ 5.86
$ 104.75
= 5.59 %
Solution –F
Face value of bond is $ 1000 and interest payment on same would be 7 % Sami-
annually that mean rate of interest would be 3.50 %, here is a formula.
= Face value X r/ n
Here face value is $ 1000 and annual compounding interest rate are 7 % with semi-
annual bases.
= $ 1000 X 7 % / 2
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$ 35
Risk and Return Estimation
I) Boral Limited, Estimated expected rate of return
CAPM Model
Err = Risk free rate + Beta (Expected return from the market – Risk free rate)
Here Risk free rate = 10-year Australian Government bond, this rate as on 19.04.2019
is 1.98 %.
Market Risk Premium would be 6 %.
Beta of Boral Limited during last 5 years was 1.14
Computation of Expected return
ER = 1.98% + 1.14(6 % - 1.98 %)
= 1.98 % + 4.58 %
= 6.56 %
=
II) Hypothetical Company with negative beta of -0.20
Err = Risk free rate + Beta (Expected return from the market – Risk free rate)
= 1.98 % + (-0.20) (6 % - 1.98 %)
= 1.18 %
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A) Computation of expected return from the portfolio
Particulars ER as per CAPM Weight Portfolio Return
Boral Limited 6.56 % 0.50 1.99 %
Hypothetical
Company
1.18 % 0.50 0.59 %
TOTAL 2.59 %
Risk and Return analyses
The Financial theory states that a project having a high risk will generate a higher
return but there will not be any surety that a project having a high risk will surly
generate the high return. The similar situation are noted for the project having a low
risk, based on the risk and return theory. One thing is clear that is risk and return has a
positive relations, and they moves in the same directions.
Inventor’s analysis the option of financial instruments based on the concept of
expected return and risk associated with the instruments. The beta is an indictors of
risk associated with the investment option, broadly the beta are analysis in term of
equal to or in excess of 1 or less than 1. That mean any security having a beta in
excess of 1 indicates, that a said security may be very or volatise within the range of
excess beta proportion. Here In current case the beta of Boral Limited is 1.14 that
mean the security may be vary between 1 to 14 %, such volatility rate established a
connection between the return and risk associated with the project or investment
options.( Investopedia. (2019).
Out of many financial model to analysis the financial option theoretically CAPM is
one of the popular model to measure the expected return from the securities. The
model of CAPM is popular one because of the facts that Model focused on all factors
which directly or indirectly influence the expected rate of return, such as market risk,
risk free return, beta and expected return from the markets. (Readyratios.com.
(2019).
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Current case:
Beta of the Boral Limited was 1.14 during the last five year, that means volatility or
sensitivity in the security of Boral is comparatively lower than the high risky
securities. This security surly gives a return which may be comparatively higher than
the risk free security, or the security having a beta less than 1 or negative beta. (Levy,
H. (2014).
In the solution 2 a) we have competed the expected rate of return of Boral Limited,
the beta of said security is 1.14 which indicate low sensitively, in such as case,
expected return fall near the market risk free security, and our actual answer is also 6.
56%, while in case of Hypothecated security having a negative beta, which mean the
expected rate of return from the security fall near to the risk free rate of return, which
equal to the 10 year Australian bonds. So the beta is core elements of CAPM model
to measure and to indicate the expected return from the security, the user of the model
can easily make prediction about the risk and return associated with the security.
(Medium. (2019).
Current portfolio
Particulars ER as per CAPM Weight Portfolio Return
Boral Limited 6.56 % 0.50 1.99 %
Hypothetical
Company
1.18 % 0.50 0.59 %
TOTAL 2.59 %
Our portfolio consisting mainly two securities, one is average risky and another on is
risk free security, hence the return from the portfolio will be comparatively lower than
return from the market. The above table show the performance of portfolio.
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References
Investopedia. (2019). Explaining the Capital Asset Pricing Model (CAPM).
Available at: https://www.investopedia.com/articles/06/capm.asp [Accessed 19
Apr. 2019].
Levy, H. (2014). Risk-Return Analysis: The Theory and Practice of Rational
Investing. Quantitative Finance, 14(7), pp.1141-1144.
Medium. (2019). CAPM Analysis: Calculating stock Beta as a Regression with
Python. Available at: https://medium.com/python-data/capm-analysis-
calculating-stock-beta-as-a-regression-in-python-c82d189db536 [Accessed 19
Apr. 2019].
Readyratios.com. (2019). Capital Asset Pricing Model (CAPM). Available at:
https://www.readyratios.com/reference/analysis/capital_asset_pricing_model_c
apm.html [Accessed 19 Apr. 2019].
Supplemental Material for the Predictive Properties of Dynamic Sex Offender Risk
Assessment Instruments: A Meta-Analysis. (2017). Psychological Assessment.
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