Financial Management Assignment: Risk, Return, and Investment Analysis

This finance assignment solution addresses key concepts in financial management. It begins by defining and differentiating between systematic and unsystematic risks, providing examples for each. The solution then calculates the Net Present Value (NPV) and Internal Rate of Return (IRR) of a project, advising on project acceptance. The Capital Asset Pricing Model (CAPM) is applied to determine the required rate of return for a stock. The assignment further analyzes the volatility, expected return, and coefficient of variation for two stocks, comparing their risk profiles. Bond and stock valuation are also calculated, including the calculation of Yield to Maturity (YTM) and the cost of equity using the dividend growth model and preference capital. The assignment concludes by discussing diversification and the expected rate of return, providing a comprehensive overview of financial analysis and investment decision-making.

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FINANCE

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Table of Contents
Question 1...................................................................................................................................................3
Question 2...................................................................................................................................................3
Question 3...................................................................................................................................................4
Question 4...................................................................................................................................................4
Question 5...................................................................................................................................................4
Question 6...................................................................................................................................................4
Question 7...................................................................................................................................................4
Question 8...................................................................................................................................................5
Question 9...................................................................................................................................................5
Question 10.................................................................................................................................................5
References...................................................................................................................................................6
References...................................................................................................................................................7

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Question 1
Systematic Risk can be termed as a hazard existing in the securities exchange. These dangers are
material to all the parts yet can be controlled. Unsystematic Risk is an industry or firm-explicit
danger in every sort of speculation. It is otherwise called "Explicit Risk", "Diversifiable hazard"
or "Leftover Risk". These are dangers which are already present and yet are impromptu and can
happen anytime in causing broad interruption. The example of the systematic risk is inflation and
movement in interest rate and the example of the unsystematic risk is high labor turnover and
high operational costs. The unsystematic risk is more important than the systematic risk
(Waemustafa & Sukri, 2016).
Question 2
Years Amount
Discounting
factor
Present
value
0
$
(13,000.00) 1.000 -13000
1
$
2,000.00 0.909 1818
2
$
4,000.00 0.826 3306
3
$
6,000.00 0.751 4508
4
$
9,000.00 0.683 6147
Net present value 2779
The net present value is $2779
The discounting rate assumed is
10%
Internal rate of return
Years Amount
0 $ (13,000.00)
1 $ 2,000.00

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2 $ 4,000.00
3 $ 6,000.00
4 $ 9,000.00
IRR 18%
Question 3
Bond rate 5%
Beta 1.5
Average return 12%
RF + BETA*(MP-RF)
Cost of EQUITY 15.50%
Question 4
Economy Probability Orl Utility Orl Tech
Recession 0.2 4% -10%
Bad 0.1 6% 4%
Normal 0.4 10% 14%
Boom 0.2 14% 30%
Volatility Orl Utility Orl Tech
Recession 0.008 -0.02
Bad 0.006 0.004
Normal 0.04 0.056
Boom 0.028 0.06
Volatility 0.014168627 0.034102786
Expected rate of return
Volatility Orl Utility Orl Tech
Recession 0.008 -0.02
Bad 0.006 0.004
Normal 0.04 0.056
Boom 0.028 0.06
Expected rate of return 8.20% 10.00%
Coefficient of variation Orl Utility Orl Tech
Standard deviation 0.014168627 0.034102786
Mean 0.09 0.10

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Coefficient of variation 16.67% 35.90%
The stock of Orl Tech is riskier in comparison between the two stocks.
Question 5
Face value 1000
Bond value 1100
Number of years 16
Coupon 0.05
Calculation of YTM 4.17%
(C + FV - BV)/N/(FV + BV )/2)
Question 6
Dividend 6
Growth rate 4%
Stock price 80
Stock Price * ( Cost of equity - Growth Rate) 80C - 80*4%
Dividends 6.24
80C 9.44
Cost of equity 11.80%
Question 7
Annual dividend 8.5
Net proceeds 1100
Cost of preference capital 0.77%
Question 8
Capital asset pricing model is a model which displays the relationship between the expected
return and risk that is associated with the investment. The formula that is used to describe the
CAPM model has been determined below along with hypothetical figures (Misra, Vishnani &
Mehrotra, 2019).

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Risk free rate of return 4%
Beta 1.2
Market risk premium 8%
RF + BETA*(MP-RF)
Cost of EQUITY 8.80%
 The risk free rate is a rate that is typically equal to a yield possessed on a 10 year
government bond.
 The market risk premium also known as an expected rate of return represents the rate on
the capital asset.
 The beta factor is a metric that is used to measure the risk, reflected by measuring the
fluctuation as the price movements occur.
Question 9
There are certain reasons which make it difficult for the diversification of the market risk and
such factors have been outlined below.
 While diversifying only leads to the average return and it becomes too complicated in
indexing.
 If the holdings are widely diversified, there are very rare chances that company can earn a
huge profit from a single sector as to suffer a huge loss (Fernandez, Ortiz & Acín, 2016).
Question 10
The RRR speaks to without a doubt the base rate of profitability one would acknowledge for that
venture to be beneficial.
Expected rate of return is the arrival for speculation where the investors hope to gather when
putting resources into a stock (Damodaran, 2018).

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References
Damodaran, A. (2018). The Investment Principle: Risk and Return Models. NYU Stern School of
Business.
Fernandez, P., Ortiz, A., & Acín, I. F. (2016). Market Risk Premium used in 71 countries in
2016: a survey with 6,932 answers. Madrid: IESE Business School. University of
Navarra.
Misra, D., Vishnani, S., & Mehrotra, A. (2019). Four-moment CAPM Model: Evidence from the
Indian Stock Market. Journal of Emerging Market Finance, 18(1_suppl), S137-S166.
Waemustafa, W., & Sukri, S. (2016). Systematic and unsystematic risk determinants of liquidity
risk between Islamic and conventional banks. International Journal of Economics and
Financial Issues, 6(4), 1321-1327.