Business Finance: Loan Amortization, Investment Decisions, & Ratios

This business finance assignment solution covers a range of topics including loan amortization schedules, investment appraisal techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR), and financial ratio analysis. The loan analysis section calculates monthly payments, interest and principal components, and the impact of refinancing. The investment appraisal section evaluates projects using payback period, NPV, and IRR, considering different discount rates. The financial ratio analysis section defines and explains the significance of various ratios, including liquidity, solvency, and profitability ratios. The assignment also includes systematic and unsystematic risk, and portfolio rate of return calculation. Desklib offers a wealth of similar solved assignments and study resources for students.

Running Head: Business Finance
Business Finance

Business Finance 1
Table of Contents
Question 1.............................................................................................................................................3
Part 1.................................................................................................................................................3
Part 2.................................................................................................................................................3
Part 3.................................................................................................................................................3
Part 4.................................................................................................................................................3
Part 5.................................................................................................................................................3
Part 6.................................................................................................................................................4
Part 7.................................................................................................................................................4
Part 8.................................................................................................................................................4
Part 9.................................................................................................................................................4
Question 2.............................................................................................................................................5
Part a..................................................................................................................................................5
Part b.................................................................................................................................................5
Part c..................................................................................................................................................5
Question 3.............................................................................................................................................6
Question 4.............................................................................................................................................7
Question 5.............................................................................................................................................7
Part a..................................................................................................................................................7
Part b.................................................................................................................................................8
Part c..................................................................................................................................................8
Part d.................................................................................................................................................8
Question 6...........................................................................................................................................10
Part a................................................................................................................................................10
Part b...............................................................................................................................................10
Part c................................................................................................................................................11
Question 7...........................................................................................................................................12
Question 8...........................................................................................................................................13
Part a................................................................................................................................................13
Part b...............................................................................................................................................13
Part c................................................................................................................................................13
Part d...............................................................................................................................................14
Part e................................................................................................................................................15
Part f................................................................................................................................................15

Business Finance 2
Question 9...........................................................................................................................................16
Question 10.........................................................................................................................................17
Part a................................................................................................................................................17
Part b...............................................................................................................................................17
Part c................................................................................................................................................17
Part d...............................................................................................................................................17
Part e................................................................................................................................................17
References:..........................................................................................................................................18

Business Finance 3
Question 1
(Amount in $)
Cost of Building 25000000
Loan 80%
Loan amount 20000000
Years to maturity 10
Monthly repayment of loan
Interest (Yearly) 8%
Interest (Monthly) 0.67%
No. of instalments 120
Part 1
Monthly payment of loan
(Instalment) = Loan Amount
Cumulative present value factor(0-
120)
Instalment = 20000000
83.27807721
Instalment (Amount) = 240159.2432
Part 2
First Interest Payment 1,33,333.33
Part 3
First principle payment 1,06,825.91
Part 4
After making monthly payment for 3 Years
Amount overdue after 36 monthly instalment payment 1,55,34,059.74
Part 5
Amount left for repayment at the end of year 3 1,55,34,059.74
Cost of refinance 2,50,000
Total amount to be repaid 1,57,84,059.74
Interest (Annual) 7%
Interest (monthly) 0.583%
Years to Maturity 7
Total no. of instalments 84
Cumulative PVF 67.266
Instalment 2,34,651.83
Previous Instalment 2,40,159.24
Difference in loan payments 5,507.41
PV of the difference in loan payment 3,70,460.69

Business Finance 4
Part 6
Interest (annually) 8%
Interest (quarterly) 2%
Amount of loan 2,00,00,000.00
Years to maturity 10
No. of instalments 40
Cumulative PVF 28.35547924
Instalment 7,05,331.05
Part 7
Amount of loan overdue after 3 years of instalments payments 15576301.57
Part 8
Annual percentage rate on ten year loan (APR) 8%
Part 9
Effective Annual rate (1+i/n)^n-1
I 8%
N 12
Effective Annual rate 8.30%

Business Finance 5
Question 2
Face Value of Bond 100
Realisable value 78.12
Maturity 10 years
Part a
FV (Future Value) 100
PV (Present Value) 78.12
N 10
PV = FV/(1+r)^n
78.12 = 100/(1+r)^10
(1+r)^10 = 1.2800819
1+r = 1.0249998
R = 0.0249998
R = 2.50%
Part b
FV (Future Value) $ 100.00
R 3.50%
N 9
PV = FV/(1+r)^n
PV = $ 73.37
Loss = $ 4.75
Part c
C = $ 25.00
T = 9
R = 3.50%
F = $ 1,000.00
Bond value =
C*[{1-1/(1+r)^t}/r]+[F/
(1+r)^t]
Bond Value = $ 923.92
Loss = $ 76.08
Comparison
Part b
Loss Percentage = 6.08%
Part c
Loss percentage = 8.23%

Business Finance 6
Question 3
Price of shares today
D1(Dividend) 3.28
G (Growth rate) 5%
Ke (Cost of Equity) 11%
Po (current price) = D1/(Ke-g)
Po = 54.67
Rate of return
D1 (Expected dividend) 3.7
Po 54.67
G 0.05
Ke ?
Ke = (D1/Po)+g
Ke = 12%

Business Finance 7
Question 4
a) Janet Yellen retires as Chairman of the Federal Reserve and Arnold Schwarzenegger
is appointed to take her place. (Systematic Risk)
b) Martha Stewart is convicted of insider trading and is sentenced to prison.
(Unsystematic risk)
c) An OPEC embargo raises the world market price of oil. (Systematic Risk)
d) A major consumer products firm loses a product liability case. (Unsystematic Risk)
e) The US Supreme Court rules that no employer can lay off an employee without first
giving 30 days’ notice. (Systematic Risk)
Question 5
Initial
investment 85,000.00
Useful Life 5Years
Cost of Capital 0.12
Year Cash Flows
1.00 18,000.00
2.00 22,500.00
3.00 27,000.00
4.00 31,500.00
5.00 36,000.00
Part a
Payback Period
Year
Cash
Flows
Cumulative cash
Flows
1.00 18,000.00 18,000.00
2.00 22,500.00 40,500.00
3.00 27,000.00 67,500.00
4.00 31,500.00 99,000.00
5.00 1,35,000.00

Business Finance 8
36,000.00
Payback
Period = 3.56
Part b
Year
Cash
Flows PVF @ 12%
PV of cash
flows
-
-
85,000.00 1.00 -85,000.00
1.00 18,000.00 0.89 16,071.43
2.00 22,500.00 0.80 17,936.86
3.00 27,000.00 0.71 19,218.07
4.00 31,500.00 0.64 20,018.82
5.00 36,000.00 0.57 20,427.37
NPV 8,672.54
Part c
Year
Cash
Flows PVF @ 20%
PV of cash
flows
PVF @
15%
PV of cash
flows
-
-
85,000.00 1.00 -85,000.00 1.00 -85,000.00
1.00 18,000.00 0.83 15,000.00 0.87 15,652.17
2.00 22,500.00 0.69 15,625.00 0.76 17,013.23
3.00 27,000.00 0.58 15,625.00 0.66 17,752.94
4.00 31,500.00 0.48 15,190.97 0.57 18,010.23
5.00 36,000.00 0.40 14,467.59 0.50 17,898.36
NPV -9,091.44 1,326.93
IRR = 16%
IRR = LDR+ NPV- NPV at LDR *(HDR-LDR)
NPV at LDR- NPV at HDR
Part d
The investment can be done in this project as NPV of the project is positive and the IRR is
more than the company’s rate of return. The company can implement the project as the NPV
and IRR both have positive implication on the acceptability of the project. Positive NPV

Business Finance 9
shows that companies’ profits will increase gradually with the acceptance of the project
(Petty, Titman, Keown, Martin, Martin & Burrow, 2015).
* Payback Period= Base Year+ Cumulative cash flows of previous year
Cash Flows of Base Year

Business Finance 10
Question 6
Discount
rate 15%
Part a
Year
Renovate
(X)
Replace
(Y) PVF @ 15%
PV of cash flows
of X
PV of cash
flows of Y
0
-
90,00,000.
00
-
10,00,000.0
0 1
-
90,00,000.00
-
10,00,000.00
1
35,00,000.
00 6,00,000.00
0.86956521
7 30,43,478.26 5,21,739.13
2
30,00,000.
00 5,00,000.00
0.75614366
7 22,68,431.00 3,78,071.83
3
30,00,000.
00 4,00,000.00
0.65751623
2 19,72,548.70 2,63,006.49
4
28,00,000.
00 3,00,000.00
0.57175324
6 16,00,909.09 1,71,525.97
5
25,00,000.
00 2,00,000.00
0.49717673
5 12,42,941.84 99,435.35
NPV 11,28,308.89 4,33,778.78
Ranking
Renovate I
Replace II
Part b
Year
Renovate
(X)
PVF @
20%
PV of Cash
Flows PVF @ 25%
PV of Cash
Flows
0
-
90,00,000.
00 1.00
-
90,00,000.0
0 1.00
-
90,00,000.00
1
35,00,000.
00 0.83
29,16,666.6
7 0.80 28,00,000.00
2
30,00,000.
00 0.69
20,83,333.3
3 0.64 19,20,000.00
3
30,00,000.
00 0.58
17,36,111.1
1 0.51 15,36,000.00

Business Finance 11
4
28,00,000.
00 0.48
13,50,308.6
4 0.41 11,46,880.00
5
25,00,000.
00 0.40
10,04,693.9
3 0.33 8,19,200.00
NPV 91,113.68 NPV
-
7,77,920.00
IRR 20.49%
Year
Replace
(Y)
PVF @
30%
PV of Cash
Flows PVF @ 40%
PV of Cash
Flows
0
-
10,00,000.
00 1.00
-
10,00,000.0
0 1.00
-
10,00,000.00
1
6,00,000.0
0 0.77 4,61,538.46 0.71 4,28,571.43
2
5,00,000.0
0 0.59 2,95,857.99 0.51 2,55,102.04
3
4,00,000.0
0 0.46 1,82,066.45 0.36 1,45,772.59
4
3,00,000.0
0 0.35 1,05,038.34 0.26 78,092.46
5
2,00,000.0
0 0.27 53,865.81 0.19 37,186.89
NPV 98,367.06 NPV
-
55,274.59
IRR 36%
Ranking
Renovate II
Replace I
IRR = LDR+ NPV- NPV at LDR *(HDR-LDR)
NPV at LDR- NPV at HDR
Part c
These rankings give mixed signals as NPV is the difference between initial investment and
present value of cash inflows and IRR is the rate at which PV of cash outflows (Initial
Investment is equal to Present value of cash inflows (Titman, Keown, & Martin, 2017)..