Finance Assignment: Finance Principles, Calculations, and Analysis

This finance assignment delves into various concepts and techniques associated with financial management. It explores key areas such as financial management principles, the significance of finance in business growth, and different types of business organizations in Australia, along with their advantages and disadvantages. The assignment also covers tax rates, value maximization strategies, and factors Australian companies should consider before expanding internationally. Furthermore, it includes calculations related to installment payments, Net Present Value (NPV), standard deviation, Weighted Average Cost of Capital (WACC), stock valuation, and the present value of growth opportunities. The assignment also addresses methods for comparing projects with different lifespans, free cash flow analysis, and the challenges of valuing real versus financial assets. It explores situations where NPV and IRR lead to different decisions, and analyzes aspects of the Australian financial system, including authorities, RBA responsibilities, and approaches to conflict resolution and ethical considerations. Lastly, it explores investment banks' role in financial innovation and the impact of the GFC.

principle of finance

Table of Contents
INTRODUCTION...........................................................................................................................4
Question 1........................................................................................................................................4
A. Finance entails........................................................................................................................4
B. Types of business organization in Australia? advantages and disadvantages of each?..........5
C. Difference in tax rates for different business organisation.....................................................6
D. Maximise value.......................................................................................................................7
E. Concern Australian companies should consider before expanding business in other
locations.......................................................................................................................................8
Question 2........................................................................................................................................9
2 A. How much need to invest today in saving account..............................................................9
2B. Annual payment for Rosie....................................................................................................9
2C. NPV of project....................................................................................................................10
Question 3......................................................................................................................................10
3A. Standard deviation..............................................................................................................10
3B. Weighted Average cost of capital (WACC).......................................................................10
Question 4......................................................................................................................................11
Option FGH should obtain.........................................................................................................11
Question 5......................................................................................................................................12
5A. Price of stock......................................................................................................................12
5B. Dividend yield ratio............................................................................................................12
5C. Value of stock.....................................................................................................................12
5D. Present value of growth opportunity...................................................................................12
Question 6......................................................................................................................................13
A. Method of comparing projects contains different useful lives.............................................13
B. Free cash flows generated by project....................................................................................14
C. Difficultuies for valuing real asset with financial asset........................................................14
D. Circumstances when NPV and IRR denote different decisions...........................................14
Question 7......................................................................................................................................15

A. NPV Perpetuity Method........................................................................................................15
B. Equivalent annual cost method.............................................................................................15
Question 8......................................................................................................................................15
A. NPV Calculation...................................................................................................................15
Total cash inflow = 499824...........................................................................................................15
B. IRR........................................................................................................................................16
C. Decisions of NPV and IRR...................................................................................................17
D. Project should accept............................................................................................................17
Question 9......................................................................................................................................17
A. Authorities in Australian Financial System..........................................................................17
B. RBA responsibilities.............................................................................................................17
C. Approaches to resolve conflicts in organisation...................................................................18
D. Ethical conflict......................................................................................................................18
E. Outline ways in which investment bank pioneer financial innovation.................................18
F. Effect of GFC........................................................................................................................18
Question 10....................................................................................................................................18
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Principle of finance is denoted as various concepts and techniques associated with the
finance. This report will emphasis on various concepts associated with the finance management.
Henceforth, report will emphasis on various essential associated with the finance and
significance of finance in order to entertain growth in the business. Different types of
organisations based in Australia will also project in this report. This report will also emphasis on
different tax rates exist in the business in Australia. Concept related to value maximisation will
also reflect in this report. Furthermore, report will also project various calculations related to
instalment payments, Net Present Value method, standard deviation and expected rate of return,
weighted average cost of capital, price of stock, dividend yield ratio, value of stock and related
calculations will project in this report. Concept related to present value of growth opportunity
will also demonstrate in this report. Methods related to comparison in project will also analyse in
this report. Difficulties will point out when valuation are done in respect to comparing real asset
and financial asset. All such expected circumstances will also analyse when the NPV and IRR
will derive different conclusions. Different factors associate with the Australian financial
structure will highlight in this report.
Question 1.
A. Finance entails
Financial management is defined as managing an controlling the financial requirements
of company. Financial resources are limited in numbers and financial management involve
analysing the financial requirements of company and based on the analysis sources are identified
to raise such financial resources and further the utilisation of such financial resources are
controlled. Due to the limitation of financial resource availability optimum level of utilisation
play a key role in order to enhance the growth of the organisation. Proper way to utilise financial
resources seek different techniques like investment evaluation techniques, dividend management
techniques, ratio analysis and different other techniques that can deliver the best level of
financial management (Sohrabi, 2017). Financial management involve investment appraisal
technique which guides the company in respect to identifying possible amount of profitability

company can generate out of the investment decision-making. Financial management function
directly control the fund allocation of company. Operational efficiencies is further directly
connected with the management of funds in company. Investment appraisal techniques like Net
Present Value, Investment rate of return method, discounted rate of return method allow
company to address the best level of assessment in respect to financial decision making that can
boost the growth rate of organisation. Financial management also involve identifying all
different risk involve in company's practices and on the basis of the financial models and
techniques such as ratio proportion and different others taking the best decisions to enhance the
business outcomes of organisation.
B. Types of business organization in Australia? advantages and disadvantages of each?
There are different type of ways in which organization can perform there action to get the
desire result they want. There are different types of Business organization in Australia: -
Sole Proprietorship: -
Sole proprietor is common organization form which is used in many small organization. It refers
to that business which is owned and operated by individual and single person. Most of the
example of this type of business organization are the family business or family owned business.
Advantages : -
 It is one of the easiest ways and less expensive form and administratively operate.
 It offers maximum number of managerial control and a direct control on the business.
 Sole proprietor can employ other and extend business accordingly. They can hire and fir
anyone(DASGUDE, 2020).
Disadvantage: -
 The liability of the owner is fully on itself as when debts become over whelming than its
directly impact owners finance.
 To raise a large amount of capital in sole proprietor is difficult.
 The company have a limited life which is linked to owners life.
Partnership: -
Partnership is a business which is owned by two or more parties, after they combine in a
partnership deed to run business. The partners contributed in business and share the management
with profit sharing and shares dividation. They can also recognize even without written contract.

Advantage : -
 It is easy and less expensive to operate and start
 they have a larger managerial control and is totally dependent on the partner what
business they are working in.
 Partnership may able to raise more capital than sole proprietor.
Disadvantage: -
 Raising capital is still a constraint.
 The liability in partnership is unlimited
 Difficult to transfer ownership.
Corporation: -
It is a legal entity which are separated from manager of firms. There things which separates
Corporation from partnership and sole proprietor are (1) they ways in which they are owned and
managed. (2) perpetual life of this. (3) the legal status which separate from owners and manager.
Advantages: -
 There are limited liability.
 The corporation have unlimited life.
 It may have possibilities to raise fund on higher number.
 Ownership is easy to transfer to other.
Disadvantages: -
 There are double of taxation
 it is complicated and expensive in administration and operations (Wu and Liu, 2017).
C. Difference in tax rates for different business organisation
In Australia government has given huge emphasis over systematic tax management in
order to enhance the growth of businesses. Government has aimed to give huge priorities over
improving the business revenues along with collecting systematic flow of revenue from taxation.
If the aggregate turnover threshold is $ 50 million the tax rate applicable for such businesses will
be 27.5% and for other companies it will go up-to 30%. Government is planning to reduce the
rate up-to 26% in the next year. In case of small businesses if the turnover is less than $ 10

million taxation will be charged at the rate of 27.5% (Hashim and Piatti-Fünfkirchen, 2018). In
case of non profit making organisation income is exempted till the taxable income of first $ 416.
IN case the income get exceeded that income tax will be applicable at the rate of 55%. If the
income is reduced to $ 832 the tax rate applicable is denoted as 27.5%. All these tax rates are
based on the paying capacity of respect organisation. Government has aimed to create a volatile
atmosphere where both government and organisations can fulfil their needs and requirements in
order to generate revenues out of the operations.
D. Maximise value
Value maximisation is a concept part of finance where organisation aims to enhance the
value of shares and stocks of such organisation. This concept is immensely use in case the
organisation needs to take any investment decision in order to entertain heavy revenues.
Techniques like Net Present Value, Investment rate of return and different other are use to
maximise the values of organisation's wealth. Different approaches like formation of strategies,
financial strategies, financial management and financial management operations. All these
approaches drives the organisation in order to enhance the value of organisation stock and
financial stability (Ryan-Morgan, 2019). Methods such as net present value, IRR, Cost of capita
guide organisation in analysing the financial potential of a certain decision-making. Financial
resources are limited in nature which makes the practice more important in respect to
organisation. Maximise value also involve improving the value of organisation's stock in market.
Shares are the key source behind raising financial resources in respect to organisation. Maximise
value also support the organisation in collecting the financial resources in a very less time frame.

Concept of maximisation of value consisted two aspects one is to maximise the wealth of
organisation and the other one is to maximise the profitability of organisation. Value
maximisation focuses on forming suitable strategies in respect to achieve both the areas of value
maximisation.
E. Concern Australian companies should consider before expanding business in other locations
Business expansion is a critical decision organisations take in order to enhance the
growth. While expanding the business at other locations following are the factors that needs to be
considered so that best level of outcomes can be entertained by organisation.
Business environment of such new location: Business environment is a sum of different
internal and external factors that put a direct impact over the business operations of organisation.
Factors like apolitical, economical, social, technological, environment and legal factors that can
influences the business of organisation at such new location. All these factors create a huge
influence in the business opportunities, growth and sustainability of the organisation.
Political stability: Political stability is another key factor that needs to be entertained by
organisation in order to expand business at different location. Political stability denote how
strong or weak the position of government in its geological locations (Tombe, 2018). If the
government hold the strong position and presence it will allow them to make strong and
beneficial policies that can sustain in long term. Long term policies of government makes the
organisation able to create long term policies for business growth and development.
Economic position of new location: Economic condition at new location also influence the
business growth of organisation in case of business expansion. In case the businesses of
Australia are looking for business expansion they require to assess the economic condition and
position of new business locations (Engel, 2018). In case the economy at new location is well
balanced and strong the buying capacity of customers will also effective due to strong per capita
income of people in such new locations. Economic position is a key indicator behind the
business expansion decision as to weather the organisation should initiate its business expansion
at such new location.
Financial position of organisation: Financial stability of organisation also create a major
impact for organisation in order to expand its business. As the business expansion at different
location requires investment of heavy financial resources associated with the organisation. In
case of business expansion at international location it seek more financial resources associated

with organisation. Organisation need to assess how much the resources needed to expand
business at any international location and on the basis of the expected amount of investment risk
also involved which needed to assess in order to make investment and business expansion
decision.
The above mentioned points are the key points that needed to consider while taking
investment decision in respect to business expansion at any international location.
Question 2
2 A. How much need to invest today in saving account
Final Amount (A) = 100000
Interest Rate (r) = 5.25%
Number of times interest apply in a year (n)= 1
Number of time period (t)= 5 years
Principle (P)
Formula for principle calculation
A = P (1 + r/n)nt
100000 = P (1 + 5.25/100)1 * 5
100000 = P (1.29)
P = 100000 / 1.29
P = 77519
2B. Annual payment for Rosie
Principle (P) = 25500
Rate ® = 8%
Time (T) = 7 years
Total interest paid in 7 years
P * R * T
25500 * 8/100 * 7
14280

Total amount paid in 7 years
Principle Amount + Total Interest paid in 7 years
25500 + 14280
39780
Per annum instalment
Total amount paid in 7 years / 7
39780 / 7
5683
2C. NPV of project
Initial Investment = 2500000
Year Cash flows Discount value @
12.5%
Actual cash flow
1 1,250,000 0.89 1112500
2 2,200,000 .790 1738000
3 2,800,000 .702 1965600
NPV = 4816100 (1112500 + 1738000 + 1965600) - 2500000
= 2316100
Question 3
3A. Standard deviation
Expected Rate of Return
Exprcted retrun * probability of such retrun
= 40 * .3 + 20 * .5 + (- 15 * .2)
= 19 % (12 + 10 – 3)
3B. Weighted Average cost of capital (WACC)
Market value of firm's equity (E)= 280 (14 * 20)

Market value of firm debt (D) = 200
Total value of capital (V) = E + D
480 (280 + 200)
Cost of equity (Re) = 2.2 / 1.07(2.05)
{2.5% is the rate of dividend one from now and rate of dividend is increasing by 7%}
Cost of debt (Rd) = 9%
Tax Rate (T) = .6 (1 - .4)
WACC
[(E / V * Re) + (D /V * Rd * {1- Tc})]
[(280 / 480 * 2.05) + (200 / 480 * .09 * {1 -.4})]
1.20225
Question 4
Option FGH should obtain
Valuation formula
∑C/(1 + r)t
Face value of bond
F / (1 + r)t
C = Future cash flows
r = discount rate
F = Face value of bond
t = number of periods
T = time to maturity
On the basis of the above calculation one year option contains 1153.72 as its outcomes.
Semi annually option contains 1154.54 and quarterly option contain 1154.96. On the basis of the
assessment organisation should go for quarterly option at it contains the best level of rate. This
option would attract the stakeholders as it contains the best rate.

Question 5
5A. Price of stock
Sale value of stock after three year = 120
Anticipated return = 8%
Price of stock
120 / 1.08
111
5B. Dividend yield ratio
Market value per share = 32.5
Dividend per share = 3.5
Dividend yield ratio
Dividend per share / Market value per share
3.5 / 32.5
7 / 65
5C. Value of stock
Before plug back
6.5 / .09
72.22
After Plug back
4.55 (6.5 * 70%) / .09
51
5D. Present value of growth opportunity
Present value of growth opportunity is a different technique used to evaluate equity
valuation. This is simply a difference in between value of stock and value in case of no growth.