Finance 12 Assignment: Time Value of Money, Risk and Return Analysis

This finance assignment, focusing on ACC00716 Finance, presents a comprehensive analysis of financial concepts. Part 1 delves into the time value of money, addressing six questions related to loan calculations, revenue growth, effective annual rates, bond valuation, and market pricing. Part 2 explores risk and return analysis, examining the Capital Asset Pricing Model (CAPM) and portfolio beta for Beacon Lighting and a Hypothetical Company. Part 3 expands on risk and return, comparing the two companies using CAPM, and assessing the impact of portfolio diversification strategies. The assignment utilizes real-world financial data, including the risk-free rate and market risk premium, to calculate expected returns and betas, providing insights into investment decisions and portfolio management. The analysis emphasizes the importance of understanding risk and return trade-offs for effective investment strategies, with references to relevant financial sources.

Financial Analysis

FINANCE 1
Part 1
Part 1 is based on the topic of “Time Value of Money”. There are six questions in the Part 1
which is based on time value of money and these are:
1.
A.
Given Data
APR 6%
Years 5
Periods 60
Periodic Rate 0.50%
PMT
$
891.00
It has been determined that the amount borrowed by BLX is $46,087.47 in 5 years with the
0.50% of periodic rate.
B.
Given Data
Annual Revenue
(million)
$
247.70
Annual Rate of growth 9.90%
Annual revenue in 5 ?

FINANCE 2
years
Annual revenue in 5
years
$1,509.2
3
According to the evaluation, the annual revenue of the company in the 5 years is $1509.23 with
the annual growth rate of 9.90%.
C.
Loan A Loan B Loan C
Rate 5.45% 5.50% 5.40%
Compounding Monthly
Semi
Annually Daily
EAR = 5.59% 5.63% 5.60%
There are three loans of BLX such as Loan A, Loan B, and Loan C. The EAR of three loans are
5.59%, 5.63% and 5.60% in Loan A, Loan B, and Loan C respectively. As per the evaluation of
all three loans, Loan A is least effective as EAR is 5.59% which is less than the other loans that
is why; Loan A must be selected.
D.
Computation of amount of payments of loan

FINANCE 3
Given Data
Loan amount $ 1,650,000.00
Year of loan 20
Number of periods 40
Interest rate (annual) 4.20%
Applicable rate 2.10%
The semi-annual payment of the company is $61,379.81 to make the loan of 20 years of
$1,650,000 with the applicable rate is 2.10% and interest rate is 4.20%.
E. Calculation of Yield of Maturity of Bonds
Given Data
C 5.85%
F
$1,000.0
0
P $922.00
N 6
YTM (solution) 7.44%
The evaluation of Yield of Maturity of Bonds is 7.44%.
F.

FINANCE 4
Calculation of the market price of the
bonds
Face Value
$
100.00
Period
Cash
Flow PVF PV
1 5 0.972 4.86
2 5 0.944 4.72
3 5 0.918 4.59
4 5 0.892 4.46
5 5 0.867 4.33
6 5 0.842 4.21
7 5 0.819 4.09
8 105 0.796 83.53
Market Price 114.80
It is determined that the market price is 114.80.
Part 2
In Part 2, risk and return amount has been evaluated with the different scenarios.
A.

FINANCE 5
Beacon Lighting
Beta 0.94
Risk Free rate 0.90%
Market Risk premium 5.50%
Return (CAPM)
Rm + (Rm-
Rf)*Beta
Return (CAPM) 9.82%
Hypothetical
Company
Beta 1.6
Risk Free rate 0.90%
Market Risk premium 5.50%
Return (CAPM)
Rm + (Rm-
Rf)*Beta
Return (CAPM) 12.86%
According to the 10 years bond of Australian Government, the risk free rate is 0.90%
(Bloomberg, 2019). The value of Beta of Beacon Lighting is 0.94 and the return percentage is
9.82%. And the value of hypothetical company is 1.6 with the return percentage of 12.86%. The
value of Beta of Hypothetical Company is high as compare to value of Beta of Beacon Lighting
which states that Beacon Lighting has less risk as compare to Hypothetical Company (Yahoo
Finance, 2019).

FINANCE 6
B.
Portfolio Beta
Stock
Weigh
t Beta
BLX 70% 0.94
Hypothetical
Company 30% 1.6
As per the above scenario, the Portfolio Beta is 1.138 in which the BLX contains weight of 70%
and Hypothetical Company contains 30%.
Part 3
Risk and return analysis defines the percentage and value of risk that an investor have while
investing into share price. There are various risks that the investors face after investing into the
company share prices. The challenges that investors face during the investment is usually on the
financial crisis (Diksha, 2019). It is required for the investors to analyze the risk and also
estimate the return value for effective investment. In this paper, the risk and return estimation is
done on Beacon Lighting and Hypothetical Company. Beacon Lighting was established in the
year 1967. Beacon Lighting operates the business in lighting, ceiling fans and light globes. It
provides the quality of services to consumers due to which it becomes the leading retailer of
lighting in Australia. It delivers the wide range of goods with the high quality of services and
advice. It encompasses design and fashion as well as pursuing the latest technology fir energy
efficiency. There are 100 stores and 4 franchises that the company operates across the Australia

FINANCE 7
(Beacon Lighting, 2019). The risk of Beacon Lighting has been estimated with the Hypothetical
Company.
There are numerous methods of measuring the risk and return value of the company. CAPM
(Capital Asset Pricing Model), Proxy Models, Multifactor model, APM and Accounting and debt
based models are the techniques of evaluating the risk and return value. In the questions 2a and
2b, the value of risk and return has been estimated. The data of Beacon Lighting and
Hypothetical Company are used to evaluate the risk and return amount. In this paper, CAPM
method has been used to evaluate the risk (Wall Street Mojo, 2019).
CAPM is a method of measuring the risk and return value. The formula of CAPM is used to
calculate the expected return of assets. This method is based on the systematic risk that an
investor needs to be compensated for risk premium. The amount of risk premium is greater than
the risk free rate. CAPM method contains Beta, and return value which helps to measures the
risk (CFI, 2020).
From the evaluation of Beacon Lighting by using the method of CAPM, it is found that the value
of Beta is 0.94 which is less due to which the value of return is less. The percentage of return of
Beacon Lighting is 9.82% which is also not too high. It is suggested that the investor has to
refuse the option for Beacon Lighting for investment as they get the less amount of return in the
exchange of investment.
As per the evaluation of Hypothetical Company, it is determined that the value of Beta is 1.6 and
the percentage of return is 12.86%. The value of Beta of Hypothetical Company is high due to
which it is able to provide the maximum amount of return to investors. It is a fact that high beta
means the high value of return to investors (The Economic Times, 2019). As per the return

FINANCE 8
value, it is suggested that the investors has to choose the Hypothetical Company for investment
but it is observed that the investors also have high risk in this company as it has provides the
high amount of return to investors.
Beacon Lighting
Hypothetical
Company
Beta 0.94 Beta 1.6
Risk Free rate 0.90% Risk Free rate 0.90%
Market Risk
premium 5.50%
Market Risk
premium 5.50%
Return (CAPM) 9.82% Return (CAPM) 12.86%
In the comparison of both the companies, it has been determined that the value of Beta of
Hypothetical Company is high with the high percentage of return which is beneficial for
investors. The value of Beta of Beacon Lighting is 0.94 which is less than the Hypothetical
Company. It depicts that Beacon Lighting has less value of Beta with the less percentage of
return. As per the evaluation of both the cases, it is observed that Beacon Lighting has less risk
as compare to Hypothetical Company. It is suggested that the investor has to take the decision
according to their capabilities as both the cases have different benefits as in the case of
Hypothetical Company, investor gets the high return but in the case of Beacon Lighting, investor
has less risk (Dhankar, 2019).
Portfolio is the level of diversification in which the investment goes across the broad number of
companies, industries, sectors and assets of classes. Portfolio Beta is the best way to evaluate the

FINANCE 9
risk and return value (Lemke, 2020). In the question 2b, the value of Portfolio Beta has been
evaluated. According to the estimation of Portfolio Beta, it is suggested that the investor has to
invest in both the companies in the different weightage in order to get the good amount of return
with the minimization of the risk. It is suggested that the investor has to invest in BLX Company
with 70% and in Hypothetical Company; the investor has to invest with 30%. Investing of both
the companies helps the investors to provide the high return with the less risk as the value of
Beta is 1.138. As per the evaluation, it is found that the value of Beta of BLX Company is 0.94
which is less than value of Portfolio Beta means the investor has less risk and gets the good
return by investing into it by 70% and similar in the case of Hypothetical Company as the value
of portfolio Beta is less than Hypothetical Company.
At the end, it can be said that it is a best option for the investors is to invest in both the
companies according to the Portfolio Beta.

FINANCE 10
References
Beacon Lighting. (2019) About Us. Available From:
http://www.beaconlightinggroup.com.au/about-us [Accessed 10/4/2020].
Bloomberg. (2019) Government Bond Yields. Available From:
https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia [Accessed
10/4/2020].
CFI. (2020) Capital Asset Pricing Model (CAPM). Available From:
https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-capm-formula/
[Accessed 10/4/2020].
Dhankar, R.S. (2019) Value at Risk and Mutual Funds. In Risk-Return Relationship and
Portfolio Management (pp. 279-291). Springer, New Delhi.
Diksha, S. (2019) Risk and Expected Return (With Diagram). Available From:
https://www.businessmanagementideas.com/financial-management/risk-and-return/risk-and-
expected-return-with-diagram/3910 [Accessed 10/4/2020].
Lemke, T. (2020) How Do You Calculate Portfolio Beta?. Available From:
https://www.thebalance.com/how-to-calculate-your-portfolio-beta-4590382 [Accessed
10/4/2020].
The Economic Times. (2019) Definition of 'Beta'. Available From:
https://economictimes.indiatimes.com/definition/Beta [Accessed 10/4/2020].

FINANCE 11
Wall Street Mojo. (2019) Capital Asset Pricing Model (CAPM). Available From:
https://www.wallstreetmojo.com/capital-asset-pricing-model-capm/ [Accessed 10/4/2020].
Yahoo Finance. (2019) Beacon Lighting Group Limited (BLX.AX). Available From:
https://au.finance.yahoo.com/quote/BLX.AX/ [Accessed 10/4/2020].