Financial Management Homework: Ratio, Bond, and Investment Analysis

This homework assignment covers several key areas of financial management. It begins with calculations of holding period returns and then delves into the impact of various financial decisions on key financial ratios like current, quick, and debt-equity ratios. The assignment also includes calculations for future value of an investment, bond valuation, including yield to call, and the calculation of real interest rates, maturity risk premiums, default risk premiums, and seniority risk premiums. The assignment further explores capital budgeting techniques, including net investment calculations, net present value (NPV), and profitability index (PI) analysis. Finally, it calculates both standard and risk-adjusted NPV for a long-term investment project.

RUNNING HEAD: FINANCIAL MANAGEMNT
Financial Management
Student Name:
Course Work:
University:

FINANCIAL MANAGEMNT 1
Q1. Realized percentage holding period return:
= [(4400-4000+4(40))/4000 x 100%
= 14%
Q2. Following is the impact of the financial decision on the current, quick and debt-equity ratio:
a. The firm reduces its investment by $500,000 then the current ratio is 1.92 by dividing
5,750/3,000 so the current ratio remains the same. The quick ratio will be 1.08 by
dividing 3,250/3,000 and the debt-equity ratio will be 0.79 by dividing 4,750/6,000. All
the three ratios will not be impacted by reducing the investment.
b. The purchase of twenty new delivery trucks of total $500,000 impact on the current ratio
and new ratio is 1.75 by dividing 5250/3000. The new quick ratio is 0.916 by dividing
2750/3000. The debt-equity ratio is same 0.79 by dividing 4,750/6,000.
c. The investment of short term loan of $500,000 impacts on the current ratio and the new
ratio is 1.78 by 6250/3000. The new quick ratio is 0.928 by dividing 3250/3000. The
new debt-equity ratio is 0.875 by dividing 5250/6000.
d. The use of mid-term loan of $2 Million for the expansion of plant impacts on the
financial ratios. The current ratio is 1.92 which remains the same by dividing 5750/3000.
The quick ratio is 1.08 which is also remains the same by dividing 3250/3000. The new
debt-equity ratio is 1.125 by dividing 6750/6000.
e. The firm sells $2 Million in common stock and uses it to expand its plant which impacts
on the financial ratios. The current ratio is 1.92 by dividing 5,750/3,000 so the current
ratio remains the same. The quick ratio is 1.08 which is also remains the same by
dividing 3250/3000. The new debt-equity ratio is 0.593 by dividing 4750/8000.
Q3. Following is the calculation of amount that needs to be invested:
$600,000 = PMT (FVIFA.09, 25) = PMT (84.701)
PMT = $7,083.74
Q4. Following are the given values are:
Face value of the bond is $1,000
Annual coupon rate is 7 3/8%
Years of maturity is 7 years
Current price of the bond is $900

FINANCIAL MANAGEMNT 2
Callable price of the bond is $1,037.08
Following are the calculations of the YTC of the bond:
The bond is callable so the selling price become present value and the price become the future
value. The values are inserted in the Fx function in excel. Following table shows the calculations.
Nper = 7
PMT = 73.75
PV= 900 9.81%
FV= -1037.08
Thus, the yield to call of the bond is 9.81%
Q5. Following table shows the calculations:

FINANCIAL MANAGEMNT 3
Solution:
D0 1.5
G 11% 4 years
G 5% perpetuity
Ke 14%
PVF
1 D1 1.67 0.877193 1.46
2 D2 1.85 0.769468 1.42
3 D3 2.05 0.674972 1.38
4 D4 2.28 0.59208 1.35
4 P0 26.57 0.59208 15.73
21.34 Present share value of Seneca
D5 2.39
P0 26.57
Q6.
a. The current real rate of interest for 1 year treasury bond is calculated as follows:
rf = 3% real return + 7% inflation premium = 10%
b. Following is the calculation of maturity risk premium between 10 year bond and 1 year
bond:
12% - 10% = 2% maturity risk premium between a 10-year bond and a 1-year bond.
c. Following is the calculation of default risk premium:
Default risk premium = 13% - 12% = 1%
d. Following is the calculation of seniority risk premium:
American risk premium = 16% - 13% = 3%
Q7.
a. Following is the calculation of net investment:
Purchase Price $130,000
Installation charges $30,000
Sale value of old
system ($20,000)
Net Investment $140,000

FINANCIAL MANAGEMNT 4
b. Following excel shows the calculation of net cash flows:
Increase Revenue $32,000
Decrease in operating cost $2,000
Depreciation ($16,000)
PBT $18,000
Tax @40% $7,200
PAT $10,800
PAT + Dep. $26,800
Annual net cash flow $26,800
Q8. Following is the calculation of NPV and PI:
NPV = -$20,000 + $3,000(PVIFA0.12, 10)
= - $20,000 + $3,000(5.650) = -$3,050
PI = $3,000(5.650)/$20,000 = 0.85
The project is not acceptable because it has a negative NPV and a PI of less than 1.0.
Q9.
a. Following is the calculation of Net present value:
NPV = -1800000 + 400000/(1+.15)^1 + 400000/(1+.15)^2 + 400000/(1+.15)^3 +
400000/(1+.15)^4 + 400000/(1+.15)^5 + 400000/(1+.15)^6 + 400000/(1+.15)^7 +
400000/(1+.15)^8 + 400000/(1+.15)^9 + 400000/(1+.15)^10 + 400000/(1+.15)^11 +
400000/(1+.15)^12 + 400000/(1+.15)^13 + 400000/(1+.15)^14 + 400000/(1+.15)^15 +
400000/(1+.15)^16 + 400000/(1+.15)^17 + 400000/(1+.15)^18 + 400000/(1+.15)^19 +
400000/(1+.15)^20 = 703732.59
Thus, the NPV is 703732.59
b. Following is the calculation of risk adjusted net present value:
Risk Adjusted NPV = -1800000 + 400000/(1+.24)^1 + 400000/(1+.24)^2 + 400000/(1+.24)^3 +
400000/(1+.24)^4 + 400000/(1+.24)^5 + 400000/(1+.24)^6 + 400000/(1+.24)^7 +
400000/(1+.24)^8 + 400000/(1+.24)^9 + 400000/(1+.24)^10 + 400000/(1+.24)^11 +
400000/(1+.24)^12 + 400000/(1+.24)^13 + 400000/(1+.24)^14 + 400000/(1+.24)^15 +

FINANCIAL MANAGEMNT 5
400000/(1+.24)^16 + 400000/(1+.24)^17 + 400000/(1+.24)^18 + 400000/(1+.24)^19 +
400000/(1+.24)^20 = -155897.28
Thus, the risk adjusted NPV is -155897.28