Accounting & Finance Homework: Financial Analysis and Valuation

This finance assignment solution addresses various aspects of financial analysis and investment management. It begins with calculations involving compound interest, present value, and future value, including scenarios related to lottery winnings, annuities, and the sale of future rights. The assignment then delves into the concept of shareholder wealth maximization versus profit maximization, discussing the preferences of risk-averse investors. The core of the assignment involves analyzing stock performance data for CBA, Rio Tinto, and the All Ordinary Index, calculating holding period returns, average monthly returns, and annual returns. The solution also includes the computation of standard deviation, beta, and expected returns using the Capital Asset Pricing Model (CAPM), and concludes with a portfolio return and beta calculation based on the weighted average of individual stock returns. This assignment provides a comprehensive overview of financial concepts and their practical application.

Running head: ACCOUNTING & FINANCE
Accounting & Finance
Name of the University
Name of the student
Authors note

1ACCOUNTING & FINANCE
Table of Contents
Answer to Question 1:................................................................................................................2
Requirement a:.......................................................................................................................2
Requirement b:.......................................................................................................................2
Requirement c:.......................................................................................................................2
Requirement d:.......................................................................................................................3
Requirement e:.......................................................................................................................3
Answer to Question 2:................................................................................................................4
Requirement 1:.......................................................................................................................4
Requirement 2:.......................................................................................................................4
Answer to Question 3:................................................................................................................5
Requirement i:........................................................................................................................5
Requirement ii:.......................................................................................................................6
Requirement iii:......................................................................................................................7
Requirement iv:......................................................................................................................7
Requirement v:.......................................................................................................................8
Requirement v:.......................................................................................................................8
Requirement vi:......................................................................................................................9
Requirement vii:.....................................................................................................................9
Requirement viii:....................................................................................................................9
Reference:................................................................................................................................10

2ACCOUNTING & FINANCE
Answer to Question 1:
Requirement a:
Requirement b:
Particulars Amount
Total Value of Lottery A $200,000
Initial Withdraw B $20,000
Investment Value C=A-B $180,000
Rate of Interest p.a. D 10%
Deferred Period (in years) E 4
Future Investment Value
after 4 years F=Cx(1+D)^E $263,538
Monthly Rate of Interest G=D/12 0.83%
Nos. of Monthly Payments H 180
Size of Equal Payments
I=(GxF)/[1-(1+G)^-
H] $2,832
Particulars Amount
Total Fund Desired A $10,000
Periodic Payments B $800
Interest Rate p.a. C 10%
Nos. of Payments p.a. D 2
Compound Interest E=C/D 5.00%
Total nos. of Payments F=NPER(E,B,0,(-A)) 9.95
Nos. of Full Payments G=F-0.95 9
Size of Concluding Payment H=Bx(F-G) $760

3ACCOUNTING & FINANCE
Requirement c:
Particulars Amount
Annual Deposit A $4,000
Interest Rate p.a. B 5%
Nos. of Deposits C 11
Total Deposit Amount in
2017
D=(1+B)xA[{(1+B)^C
-1}/B] $59,669
Requirement d:
The table, given below, exhibits that the singer would suffer loss for selling the rights
now.
Particulars Amount
Annual Payment A $20,000
Interest Rate p.a. B 6%
Nos. of Deposits C 10
Present Value of the Total
Payments
D=(1+B)xA[{1-
(1+B)^-C}/B] $156,034
Current Sale Price of Future
Rights E $150,000
Loss on Sales F=E-D ($6,034)
Requirement e:
Period
Growth in Annual
Payments
Annual
Annuity
Discoun
t Rate
Discounted
Annuity
A B C D
E=C/
((1+D)^A)
1 0% $1,000 12% $893
2 10% $1,100 12% $877

4ACCOUNTING & FINANCE
3 10% $1,210 12% $861
4 10% $1,331 12% $846
5 10% $1,464 12% $831
6 10% $1,611 12% $816
7 10% $1,772 12% $801
8 10% $1,949 12% $787
9 10% $2,144 12% $773
10 10% $2,358 12% $759
Cost of Annuity $8,244
Answer to Question 2:
Requirement 1:
Concept of maximizing value of shareholder’s wealth deals with increasing the capital
gain of shareholders or net value of business intending to give the highest possible return.
Strategy of maximizing the shareholder wealth comprise of making investment decisions that
are sound and takes into consideration risk factors that would outweigh or compromise
anticipated benefits. This particular concept is long-term approach that deals with efficiently
allocating the resources and wealth maximization is one of the universally accepted
objectives of any profit making organization. Profit maximization concept on other hand is
short-term approach that is indirectly related with increasing shareholder wealth. Increase in
profit would lead to increased payment of dividend and increasing the value of share price.
Organization employing model of shareholder wealth maximization are able to obviate the
shortcomings of model of profit maximization (Adrian et al., 2014). It is essential on part of
organization to make investment in capital that would generate return more than the cost of
capital.
Requirement 2:
Risk averse investors are those who prefer to make investments in assets carrying
lower level of risks when they are posed with the option of two investments. Investment

5ACCOUNTING & FINANCE
assets of such investors include government bonds, certificate of deposits, fixed deposits, and
treasury bills and certificate of deposits. Such type of investments generates return and profit
intending for short time period. Portfolio of risk free assets carry lower level of return and
generates fixed level of income. However, making investments in such types of asserts does
not generates higher return and often provided shorter benefits. They are not able to take
benefits of market and have issues in selecting right investment vehicles. Corporate manager
should make investments by properly allocating resources between risky assets and risk free
assets (Harlow et al., 2016). It is advisable on their part to make investments in a way that
generates desirable return to investors. Nonetheless, investment in risky assets would lead to
increased return but with additional level of interests.
Answer to Question 3:
Requirement i:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%

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2/1/2016
3/1/2016
4/1/2016
5/1/2016
6/1/2016
7/1/2016
8/1/2016
9/1/2016
10/1/2016
11/1/2016
12/1/2016
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
CBA Rio Tinto All Ordinary Index
Requirement ii:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%
Average Monthly
Holding Period
Return 2.27% 5.02% 1.29%

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Requirement iii:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%
Annual Holding
Period Return 1.96% 4.29% 1.15%
Requirement iv:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%
Standard Deviation 5.26% 8.64% 2.99%

8ACCOUNTING & FINANCE
Requirement v:
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
0%
1%
2%
3%
4%
5%
Series2 CBA Rio Tinto
Requirement v:
CBA Rio Tinto
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
Long Term Market
Return 7% 7%
Risk Free Rate 3.25% 3.25%
Beta 1.1 0.95
Expected Returns 7.38% 6.81%

9ACCOUNTING & FINANCE
Requirement vi:
0 0.2 0.4 0.6 0.8 1 1.2
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Security Market Line
Series2
Linear (Series2)
CBA
Linear (CBA)
Rio Tinto
Linear (Rio Tinto)
Beta
Return Rate
Requirement vii:
CBA Rio Tinto
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
Beta 1.1 0.95
Expected Returns 7.38% 6.81%
Weightage 60% 40%
Portfolio Return 7.15%
Portfolio Beta 1.04
Requirement viii:
From the above calculations, it can be concluded that the investor should invest in the
portfolio for optimum return at lower risk.

10ACCOUNTING & FINANCE
Reference:
Adrian, T., Etula, E., & Muir, T. (2014). Financial Intermediaries and the Cross‐Section of
Asset Returns. The Journal of Finance, 69(6), 2557-2596.
Bae, G. I., Kim, W. C., &Mulvey, J. M. (2014). Dynamic asset allocation for varied financial
markets under regime switching framework. European Journal of Operational
Research, 234(2), 450-458.
Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education
Brigham, E. F., &Daves, P. R. (2014). Intermediate Financial Management. Cengage
Learning.
DeFusco, R. A., McLeavey, D. W., Anson, M. J., Pinto, J. E., &Runkle, D. E.
(2015). Quantitative investment analysis. John Wiley & Sons
Deguest, R., Martellini, L., &Meucci, A. (2013). Risk parity and beyond-from asset
allocation to risk allocation decisions.
Duchin, R., Gilbert, T., Harford, J., &Hrdlicka, C. (2017). Precautionary savings with risky
assets: When cash is not cash. The Journal of Finance, 72(2), 793-852.
Harlow, W. V., & Brown, K. C. (2016). Market Risk, Mortality Risk, and Sustainable
Retirement Asset Allocation: A Downside Risk Perspective. Journal of Investment
Management, 14(2), 5-32.