Finance 10 Assignment: Evaluating Company Performance and Returns

This finance assignment analyzes the financial performance of two companies, Sun Ltd and Moon Ltd, and the market. It calculates and compares the annual expected rate of return, beta, and required rate of return using CAPM for both companies. The assignment also includes calculations for the current market price, yield to maturity, and WACC for each company. Furthermore, it determines the Net Present Value (NPV) of investments in both companies. The appendix provides detailed monthly return calculations used in the analysis, along with references to support the financial concepts and formulas used throughout the assignment. The analysis aims to provide insights into the companies' financial health and investment potential.

Running Head: Finance
Finance

Finance 2
Table of Contents
Question 1.............................................................................................................................................3
Question 2.............................................................................................................................................3
Question 3.............................................................................................................................................4
Question 4.............................................................................................................................................4
Question 5.............................................................................................................................................6
Question 6.............................................................................................................................................6
Question 7.............................................................................................................................................7
Appendix:..............................................................................................................................................9
References:..........................................................................................................................................10

Finance 3
Question 1
Annual Expected Rate of
Return
Sun Ltd 13.20%
Moon Ltd 8.74%
Market 6.87%
The annual expected rate of Return of Sun Ltd is much higher than the return of Moon Ltd
and market as well. We calculated the annual return by calculating the monthly return and
then taking the average of those returns and multiplying it by 12. The annual expected return
of Sun Ltd is 13.20% and the annual return of Moon Ltd is 8.74% and the annual expected
rate of return of market is 6.87% the detailed calculation is in appendix.
(Refer appendix 1)
Question 2
Beta of two companies
Sun Ltd Moon Ltd
0.60 0.54
The beta of Sun Ltd is higher than the beta of Moon Ltd as Sun Ltd beta is 0.60 and Moon
Ltd beta is 0.54. Beta is calculated by taking the slope of the returns of every month that to on
Y axis we did taken the companies return and on X axis market. As the beta of Sun Ltd is
more than the beta of Moon Ltd. Sun Ltd is more risky than Moon Ltd. The calculations are
there in the appendix.
(Refer appendix 1)

Finance 4
Question 3
Rf 4.50%
Rm 6.87%
β (Sun Ltd) 0.60
β (Moon Ltd) 0.54
Required Rate of Return using CAPM
R =
Rf + (Rm-
Rf)*β
Sun Ltd
R = 5.92%
Moon Ltd
R = 5.78%
The Return is calculated by using CAPM where Rf is the risk free rate of return and Rm is
the market risk and. The return of Sun Ltd is higher than the return of Moon Ltd (Bodie Kane
& Marcus, 2014).
Question 4
Sun Ltd
Growth Rate 3%
Ke 5.92%
Dividend (d0) 0.5
Current Share Price 17.62
Moon Ltd
Growth Rate 3.50%
Ke 5.78%
Dividend (d0) 0.5
Current Share Price 22.70
Current Market Price = D1/ (Ke-g).
The current market price of Moon Ltd is much higher than the market price of Sun Ltd.

Finance 5
Note: Here we assumed that the current dividend per share is $0.50. The dividend per
share of Sun Ltd is $ 0.50 and the dividend per share of Moon Ltd is $ 0.50.

Finance 6
Question 5
Calculation of Yield to Maturity
Face Value (FV) 1000
Price (PV) -950
Maturity (NPER) (mxn) 10
Coupon Rate(r) 4.50%
Coupon Payment (PMT) (1000*4.50%) 45
Yield to Maturity 5.15%
Bond Price = Par Value × Coupon Rate
×
1 − (1 + r)−m×n
+
Par
Value
R (1 +
r)m×n
(Malkiel, 2015)
The yield to maturity is calculated by using the above formula.
Question 6
Calculation of WACC
Sun Ltd
Debt 55%
Equity 45%
Ke 5.92%
Tax Rate 30%
Kd 3.61%
WACC 4.65%
Calculation of WACC
Moon Ltd
Debt 75%

Finance 7
Equity 25%
Ke 5.78%
Kd 3.61%
Tax Rate 30%
WACC 4.15%
The WACC of Sun ltd is 4.65% and the WACC of Moon Ltd is 4.15%. WACC is calculated
by the given formula WACC= (We*Ke+ Wd*Kd)/(We+Wd)
Question 7
Calculation of NPV of Sun Ltd.
Year Cash Inflows ($) PVF @ 3.61% PV ($)
0 -2000000 1 -2000000
1 350000 0.965 337805
2 600000 0.932 558918
3 640000 0.899 575407
4 700000 0.868 607423
5 680000 0.838 569509
6 600000 0.808 484999
7 550000 0.780 429093
8 300000 0.753 225896
NPV 1789049
Calculation of NPV of Moon Ltd.
Year Cash Inflows ($) PVF @ 3.61% PV ($)
0 -2000000 1 -2000000
1 400000 0.965 386063
2 450000 0.932 419188
3 460000 0.899 413574
4 700000 0.868 607423
5 750000 0.838 628135

Finance 8
6 600000 0.808 484999
7 550000 0.780 429093
8 400000 0.753 301194
NPV 1669669
NPV= Present Value of Cash inflows – Initial Investment.
NPV of Sun Ltd is higher than the NPV of Moon Ltd. For discounting purpose we did used
after tax yield to coupon rate. NPV represents the future prospects of accepting any proposal
as it will be profitable to invest in the project or not. The NPV of any project greater than 0
elaborates that it will be better for the company to accept the proposal and in case of mutually
exclusive projects the project with higher NPV is accepted.

Finance 9
Appendix:
Question 1 & 2
Calculation of Annual Expected Rate of Return
Month Sun Ltd
Share price
($) Expected
Monthly
Return
Moon
Ltd
Share
Price
($)
Expected
Monthly
Return
Market
ASX
index Expected
Monthly
Return
Jan-15 13.05 20.55 4650
Feb-15 13.4 2.68% 21.15 2.92% 4770 2.58%
Mar-15 13.87 3.51% 20.95 -0.95% 4840 1.47%
Apr-15 13.12 -5.41% 18.75 -10.50% 4940 2.07%
May-15 13.37 1.91% 17.1 -8.80% 4815 -2.53%
Jun-15 13 -2.77% 19.35 13.16% 4788 -0.56%
Jul-15 13.5 3.85% 20.1 3.88% 5055 5.58%
Aug-15 13.9 2.96% 21.05 4.73% 5125 1.38%
Sep-15 14.12 1.58% 22.15 5.23% 5035 -1.76%
Oct-15 14.87 5.31% 23.85 7.67% 5115 1.59%
Nov-15 15.25 2.56% 22.9 -3.98% 5100 -0.29%
Dec-15 16.05 5.25% 21.85 -4.59% 5255 3.04%
Jan-16 14.73 -8.26% 22.18 1.49% 4978 -5.28%
Feb-16 13.4 -9.00% 19.15 -13.64% 4770 -4.17%
Mar-16 13.87 3.51% 20.95 9.40% 4840 1.47%
Apr-16 13.12 -5.41% 18.75 -10.50% 4940 2.07%
May-16 13.37 1.91% 17.1 -8.80% 4815 -2.53%
Jun-16 14 4.71% 19.35 13.16% 4788 -0.56%
Jul-16 13.5 -3.57% 20.1 3.88% 5055 5.58%
Aug-16 13.9 2.96% 21.05 4.73% 5125 1.38%
Sep-16 14.12 1.58% 22.15 5.23% 5035 -1.76%
Oct-16 14.87 5.31% 22.85 3.16% 5110 1.49%
Nov-16 15.25 2.56% 22.9 0.22% 5209 1.94%
Dec-16 16.05 5.25% 20.85 -8.95% 5250 0.79%
Jan-17 16.6 3.43% 22.8 9.35% 5290 0.76%
Average Monthly Return 1.10% 0.73% 0.57%
Average Annual
Expected Return 13.20% 8.74% 6.87%

Finance 10
References:
Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education.
Malkiel, B. G. (2015). Term Structure of Interest Rates: expectations and behaviour patterns.
Princeton University Press.