ACC515 Finance Report: Investment Analysis and Firm Valuation

This report provides a comprehensive analysis of various finance-related topics, including investment decisions, risk assessment, capital budgeting, and firm valuation. It evaluates different investment options, such as loan options from ABC Bank, and assesses the risks associated with them. The report also delves into the Australian dividend imputation system and its impact on shareholders. Furthermore, it includes calculations of standard deviation and beta to measure market volatility and stock risk. The analysis extends to capital budgeting decisions, comparing upgrade proposals based on NPV, payback period, and profitability index. Finally, the report determines the appropriate cost of debt and evaluates the impact of WACC on the value of the firm using discounted cash flow models. Desklib offers a platform to access similar solved assignments and past papers for students.

Running head: FINANCE
FINANCE
Name of the Student
Name of the University
Author Note

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Table of Contents
Assessment 2...................................................................................................................................3
Answer to Question no 1.............................................................................................................3
Answer to Question no 2.............................................................................................................5
Answer to Question no 3.............................................................................................................6
Answer to Question no 4.............................................................................................................9
Answer to Question no 5...........................................................................................................10
Assessment 3.................................................................................................................................12
Part A.........................................................................................................................................12
Part B.........................................................................................................................................15
References......................................................................................................................................19

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Assessment 2
Answer to Question no 1
(b)

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(c )

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Answer to Question no 2
(a)
(i) The interest rate of 4% must be a nominal rate of interest, since inflation is given at 3%.
(ii) An interest rate which has been adjusted to eliminate the inflation effects so that real cost of
funds and real yield can be determined for borrowers and investors respectively, is known as real
interest rate. Whereas “nominal rate of interest” is referred to the “real rate of interest” after
taking into account the inflation rate. A real interest rate does not take inflation effects into
account whereas nominal rate of interest reflects inflation effects (Holston, Laubach, &
Williams, 2017).
(iii) Calculation of interest rates for Tony –
(iii) Particulars
Rate of
interest
Nominal rate of interest 4%

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Inflation rate 3%
Real rate of interest 1%
Formula for real interest
rate
((1+Nominal interest rate)/(1+ inflation
rate))-1
(iv) Real rate of interest can be equivalent to nominal rate of interest when inflation rate is 0.
The nominal interest rate will be more than the real rate interest when positive inflation prevails.
After all, “real interest rate” is the “nominal rate” only; adjusted for the inflation rate. It lets
customers and investors make a better decision with respect to loans and investments.
2 (b)
A reduction in the cash rate might lead to a reduction in other interest rates as well in the
economy. A decline in the cash rate will boost the confidence of banks to lend more money. But
there is a risk in lending to those individuals who have fewer funds to spare, after their mortgage
repayments. There is a risk of collapsing of loan arrangement along due to the unforeseen
changes to lender or investor (Moore, 2017). The decrease in cash rate is unfavourable for those
who were involved or planning to involve in property investment activities. It also affects the
rate of return on saving accounts. This condition will be favourable for those who want to save;
they will be in a position to enjoy the benefits of decreased loan rates.
Answer to Question no 3
(a) (i)

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(ii) The option 1 which is loan from ABC Bank must be selected. Since the monthly payments
are lesser in that option and also the interest payable is lower out of all the three options.

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(b) (i) The risk can be defined as the degree of uncertainty or as a prospective financial loss
which is inherent in an investment decision. It can be seen that investors seek a higher
return to compensate for the financial loss they bear (Aswath, 2016). It is not a bad thing
since the risk is involved in everything one does. If one is not willing to take calculated
risks in the investment, they might not be able to enjoy higher returns.
(ii) The “Australian dividend imputation system” is defined as a corporate tax system
where all the tax payment made by the company is attributed to the shareholders of the
company. It is distributed in the form of tax credit so that the tax payable decreases on the
time of distribution (Cormick, & McLaren, 2018).
The resident shareholders of Australia include the grossed-up dividend income in
their assessable income. The dividend amount is shown as a “gross-up” amount and
includes dividend payable amount in addition to associated franking credits. Firstly, the
“income tax” that is payable by shareholders is computed, and then franking credits are
accounted to counterbalance the tax payable.

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Answer to Question no 4
(d)
Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
HPR

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(e ) Standard Deviation of speedy = 21.71%
(f) Standard Deviation of 10.4 of market is the measurement of the volatility of the market. It
measures how extensively prices are disseminated from the average price. Speedy's standard
deviation is 21.71 % which is way higher than the market's standard deviation. The high standard
deviation of the stock reflects that prices move wildly, and this entire investment can be risky. It
assists in risk-measurement and to determine whether the investment will meet its expectation of
return in a given period of time or not. It can be concluded that when compared with the market,
the stock is highly volatile.
Answer to Question no 5
(a) Beta measures the anticipated movement in the stock in comparison with overall movement
in the market. It assists in measuring the stock volatility in comparison with the market. When a
stock has higher beta, it reflects that it is risky but also that it will provide higher returns (Kolari,
Liu & Pynnonen, 2016).
(b) The beta of APT is 1.88, which shows that it is more volatile than the market and it shows
that it is a risky investment. Beta of 1.88 shows that stock's return is estimated to move 1.88
times excess the market return. The stock with higher beta provides higher returns.
(c )The APT beta of 1.88 indicates that the stock's price is theoretically more volatile than the
market. It can be said that stock is 88% more volatile than the market. The stock is riskier than
the market by approximately 88 times.

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(e )
(i)
(ii)

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Assessment 3
Part A
(a)

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(b)
The management should not proceed with the upgrade proposal since it provides lower NPV,
payback period is also longer and Profitability index is lower as compared to the ongoing
process.
(c )

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The variable costs have shown an increase, but then also the company manages to earn profits as
it can be observed from the computed estimated cash flows for next 5 years. The company shows
increase in its profits, so they can continue with the project.
(d)
The analysis has been conducted to further evaluate the alternative use of the plant. The analysis
can be observed in the calculation and comparison drawn above.
Part B
(a)
(b) The appropriate cost of debt is 5.37% after tax.

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(c )
(d)
(e )

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(f)
(g)
(h)
The value of the company will be determined using discounted cash flow model. The
future cash flows will be discounted at the cost of capital. The cash flows are discounted at the
rate that makes the NPV of project 0 and helps to maintain the cash flows of the company as well
as total value of the company. The cost of capotal is reduced so that the total value of the firm
can be maximized. The cash flows are discounted at the cost of cpital rate to determine the
present value of cash flow for each year. The present value of cash flow for every year and NPV
of the projects reflects the time value of money.

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When the WACC was 7.42%,
Total value of firm (before) 17,522,327.54
But when WACC deceased by .5%, the new value of the firm shows an increment –
This shows that decrease in WACC will increase the value of the firm and profitability.

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References
Aswath, D. (2016). Investment valuation.
Cormick, R., & McLaren, J. (2018, December). Dividend imputation: a critical review of the
future of the system. In Australian Tax Forum (Vol. 33, No. 1).
Holston, K., Laubach, T., & Williams, J. C. (2017). Measuring the natural rate of interest:
International trends and determinants. Journal of International Economics, 108, S59-S75.
Kolari, J. W., Liu, W., & Pynnonen, S. (2016). CAPM: A Covariance Adjustment Approach for
Estimating Market Beta. Available at SSRN 2746180.
Moore, A. (2017). Measuring economic uncertainty and its effects. Economic record, 93(303),
550-575.