Financial Analysis Report: Investment Strategies and Risk Assessment

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Finance Assessment
1

Table of Contents
Part A..............................................................................................................................................3
1.......................................................................................................................................................3
2.......................................................................................................................................................3
3.......................................................................................................................................................4
4.......................................................................................................................................................5
5.......................................................................................................................................................6
6.......................................................................................................................................................6
Part B..............................................................................................................................................8
2.......................................................................................................................................................8
A......................................................................................................................................................8
B.......................................................................................................................................................8
Part C............................................................................................................................................10
A....................................................................................................................................................10
References.....................................................................................................................................11
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Part A
1.
Amount of
instalment
$15.70
Calculation of effective
interest rate:
[(1+k/m)^m-1]
Here, k = 0.07, m = 12
Substituting the values,
effective interest rate will be
computed:
[(1+0.07/12)^12-1]
Effective interest rate = 7.19%
Monthly effective interest rate
will be 0.60% (7.19/12)
Total future payments that will
be made during the tenure =
753.6 (15.7*48)
Present value of annuity factor
@0.60 for n 48 will be $742.63
It can be concluded that the concerned company will receive $ 742.63 if the period is 48 or 4
years. The above present value has been determined taking the effective interest rate be 7.19%
per annum on the assumption that the compounding has been done monthly.
2.
Year Revenue of last
year
Operating
revenue including
growth (Revenue
of current year)
(Amount in $) (Amount in $)
1 1363.70 1535.53
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2 1535.53 1729.01
3 1729.01 1946.87
4 1946.87 2192.18
5 2192.18 2468.39
Revenue of
current year
1363.70
Growth rate 12.60%
Accordingly, the annual revenue of the company will be as per the above table. For this purpose,
the revenue of base year has been taken to be 1363.70.
3.
Loan A
Calculation of effective interest rate:
[(1+k/m) ^ m-1]
Here, k = 4.93%, n = 4
Substituting the values, effective interest rate will be
[(1+0.0493/4)^4-1]
= 5.02%
In the same manner, effective interest rate of Loan B and C will be determined and thereof a
comparison shall be made.
Loan B
Here, k = 6.45%, n = 365
Effective interest rate will be = [(1+0.0645/365)^365-1]
4

= 6.66%
Loan C
Here, k = 6.52%, n = 2
Effective interest rate will be = [(1+0.0652/2)^2-1]
= 6.63%
Options Effective
interest rate
Loan A 5.02%
Loan B 6.66%
Loan C 6.63%
The above table indicates that, it is advisable to go for Loan 5.02% since obtaining funds from
this source will have the lowest effective interest rate in the hands of borrower.
4.
First of all, effective interest rate will be determined as per the aforementioned formula:
[(1+k/m) ^ m-1]
Where,
k = 3.8% per annum and m = 4
Substituting the values, effective interest rate will be determined as follow:
[(1+0.038/4) ^ 4-1]
=3.8545% p.a.
As such, effective monthly rate will be 0.3212% (3.8545/12).
Installment amount = Cost of the asset / annuity factor at the effective interest rate
5

Here, cost of the asset = $829000
Annuity factor at 0.3212% will be 99.454.
Accordingly, monthly installment amount = 829000/99.454 = $ 8335.51
Quarterly loan amount = $ 25006.53 (8335.51*3)
Thus, the quarterly payment of loan will be taken to be $ 25006.53 where the cost of the asset
will be $829000.
5.
Particulars Amount
Par Value $100.00
Number of Years to
Maturity 8
Annual Coupon Rate 6.15%
Current Price $100.50
YTM -0.001%
Thus, in the give case, yield to maturity or YTM comes out to be -0.001%. It indicates that it is
not giving as per the requirements of the concerned investor. This is because YTM is negative
and only the amount invested will be recovered.
6.
Discount factor will be determined by dividing r i.e., 3.54 by 2 since the frequency of payment is
semi-annually.
Interest amount PVF @
1.77%
Present Value of
interest payments
35 0.983 $34.41
35 0.965 $33.78
35 0.949 $33.22
35 0.932 $32.62
35 0.916 $32.06
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35 0.900 $31.50
35 0.884 $30.94
35 0.869 $30.42
35 0.854 $29.89
35 0.839 $29.37
35 0.824 $28.84
35 0.810 $28.35
Total $375.38
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Part B
2.
A.
Expected return as per CAPM = Risk free rate of return + Beta (Market return – risk free return)
Particulars Hypothetical company Cochlear
Beta -0.20 0.99
Market rate 7.9% 7.9%
Risk-free rate of return 1.90% 1.90%
The aforementioned formula will be applied to determine the expected return of both the
concerned companies under consideration.
Hypothetical company:
= 1.90 (+) (-0.20) * 6
= 0.7%
Cochlear Company:
= 1.90% (+) 0.99*6
= 7.84%
B.
(i):
Company
Weightage or
proportion Expected return
Hypothetical
company 0.50 0.7%
Cochlear 0.50 6.98%
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For computing the portfolio return, expected return will be multiplied by its corresponding
weightage.
In other words, portfolio return = 0.7* 0.50 + 6.98*0.50 = 3.84%.
(ii):
Portfolio beta is determined in the same manner as the portfolio return is determined. In other
words, beta of the concerned securities is multiplied by the corresponding beta to arrive at the
portfolio beta.
In the given case, the portfolio comprises of two securities have equal weightage and the beta of
two different companies are different from each direction. While beta of hypothetical company is
negative, beta of Cochlear is positive i.e., 0.99.
Companies Weightage Beta
Hypothetical company 50% -0.2
Cochlear 50% 0.99
Portfolio beta = (-0.2*50%) + (0.99*50%) = 0.395
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Part C
A.
There are various measures of risk and return. Generally there are two measures of risk, namely,
systematic and unsystematic risk. Systematic risk is also known as un-diversifiable risk. On the
other hand, un-systematic risk is also known as diversifiable risk. Beta comes under the
systematic risk and in the same manner standard deviation is the measure of unsystematic risk.
Conversely, there are various measures of determining the return. Some of them that are widely
used are holding period return, annual return, expected return determined as per the Capital Asset
Pricing method (widely used as CAPM) and so on. It depends on the various particular scenarios
and case.
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References
 Averkamp, H., 2019. What is yield to maturity? | Accounting Coach. [online]
AccountingCoach.com. Available at: https://www.accountingcoach.com/blog/what-is-yield-
to-maturity [Accessed on: 15 April, 2019].
 Elbannan, M.A., 2015. The capital asset pricing model: an overview of the
theory. International Journal of Economics and Finance, 7(1), pp.216-228.
 Harding, B., Tremblay, C., Cousineau, D., (2014) Standard Errors. School of Psychology,
Université d’Ottawa, vol. 10, no. 2, 1-17.
 Merritt, C., 2019. What Does Beta Mean Regarding a Corporation?. [online]
Smallbusiness.chron.com. Available at: https://smallbusiness.chron.com/beta-mean-
regarding-corporation-63065.html [Accessed 13 Apr. 2019].
 Sisson, N., 2019. Expected Return on a Portfolio. [Online] www.sapling.com. Available at:
https://www.sapling.com/8022929/expected-return-portfolio [Accessed 12 Apr. 2019].
 Waingankar, R., 2019. Present Value Factor Formula | PV Calculator (Excel Template).
[online] Wallstreetmojo.com. Available at: https://www.wallstreetmojo.com/present-value-
factor-pv/ [Accessed 13 Apr. 2019].
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