BUACC5936: Financial Management Assignment - Time Value and Risk

This financial management assignment addresses several key concepts including the time value of money, bond valuation, and capital budgeting. The first question involves calculating deposits for a retirement annuity, considering both accumulation and distribution periods, and also explores the impact of a perpetuity. The second question focuses on bond and share valuation, requiring the calculation of bond prices, coupon rates, and stock valuation using dividend models. The third question delves into investment decision criteria, calculating Net Present Value (NPV) and Internal Rate of Return (IRR) under different discount rates. Finally, the fourth question covers risk and return, requiring the creation of a Capital Allocation Line and the calculation of portfolio standard deviation. The assignment provides detailed calculations and analyses to illustrate these financial principles.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Question One-Time Value of Money:.............................................................................................3
a) Drawing a time line depicting all of the Cash flows:..................................................................3
b) Indicating the amount that needs to be accumulated by Broadbent:...........................................3
c) Calculating the deposit amount of Broadbent for retirement annuity:........................................3
d) Indicating how much deposit is needed by Broadbent:...............................................................4
e) Indicating how much deposit is needed by Broadbent if Mr Sprod's retirement annuity was a
perpetuity:........................................................................................................................................4
Question TWO-Bond and Share Valuation:....................................................................................5
a) Calculating the price of Bond A and Bond B:.............................................................................5
b) Calculating the annual coupon rate:............................................................................................5
ci) Calculating the firm’s expected dividend stream over the next 3 years:....................................6
cii) Calculating the firm’s current stock price:................................................................................6
ciii) Calculating the firm’s expected value in one year:..................................................................6
civ) Calculating expected dividend yield, capital gains yield and total return during the first year:
.........................................................................................................................................................6
Question THREE-Investment Decision Criteria/Capital Budgeting:..............................................7
a) Calculating the Net Present Value and Internal Rate of Return:.................................................7
a) Discount rate 23%:......................................................................................................................7
b) Discount rate 18%:......................................................................................................................8
c) Discount rate 10%:......................................................................................................................9
Question FOUR Risk and Return:.................................................................................................10
a) Graphing the capital Allocation Line:.......................................................................................10

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b) Indicating the fraction of investment in A, that will make the portfolio standard deviation to
12%:...............................................................................................................................................10
Bibliography:.................................................................................................................................12
Appendices:...................................................................................................................................13

2 6 12 13 22 32
0
Cash inflow: Accumulation period Cash outflow: Distribution period
12 end of year deposits@9% 20 end of year payments @12%
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Question One-Time Value of Money:
a) Drawing a time line depicting all of the Cash flows:
b) Indicating the amount that needs to be accumulated by Broadbent:
Particulars Value
PMT 42,000
I 12%
n 20
PV =PMT × 1−(1+i)−n
i =42,000 × 1−(1+12%)−20
12 % =313,717
c) Calculating the deposit amount of Broadbent for retirement annuity:
Particular
s Value
FV 3,13,717
I 9%
n 12

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PMT = FV ×i
( 1+i )n −1 =313,717 × 9 %
(1+ 9 % )12−1 =15,576.24
d) Indicating how much deposit is needed by Broadbent:
Particular
s Value
FV 3,13,717
I 10%
N 12
PMT 14,670.43
PMT = FV ×i
( 1+i ) n −1 =313,717 ×10 %
( 1+10 % ) 12−1 =14,670.43
e) Indicating how much deposit is needed by Broadbent if Mr Sprod's retirement annuity
was a perpetuity:
Particulars Value
PMT 42,000
rate 12%
PV 3,50,000.00
Particulars Value
FV 3,50,000
rate 9%
time 12
PMT 17,377.73

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Question TWO-Bond and Share Valuation:
a) Calculating the price of Bond A and Bond B:
FV 40,000
Bond A Amount Time Rate
Nothing is paid
for first 6 years 0 6 0.06
First payment 2,000 16 0.06
Second payment 2,500 12 0.06
PV
((2000/0.06)*(1-1/((1+0.06)^16))/((1+0.06)^12))+((2500/0.06)*(1-1/
((1+0.06)^12))/((1+0.06)^(12+16)))+(40000/((1+0.06)^(6+16+12)))
PV 19,661.43
Bond B Value
Rate 6%
Time 40
FV 40,000
Value 40000/((1+6%)^40)
Value 3,888.89
b) Calculating the annual coupon rate:
Particulars Value
Time 5
Current price 768
FV 1000
YTD 10%
Coupon payment
(((768*((1+10%)^4))-1000))/((((1+10%)^5)-1)/10%)
Coupon payment 38.80
Annual coupon
rate (38.80*2)/1000
Annual coupon
rate 7.76%

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ci) Calculating the firm’s expected dividend stream over the next 3 years:
Particulars Value
Dividend 2.00
Growth rate 6%
Dividend 1 (2*(1+6%)) = 2.12
Dividend 2 (2.12*(1+6%)) = 2.25
Dividend 3 (2.25*(1+6%)) = 2.38
cii) Calculating the firm’s current stock price:
Particulars Value
Dividend 2.00
Growth rate 6%
Discount rate 16%
Current stock
price (2*(1+6%))/(16%-6%)
Current stock
price 21.2
ciii) Calculating the firm’s expected value in one year:
Particulars Value
Current stock price 21.2
Growth rate 6%
Expected value 21.2*(1+6%)
Expected value 22.47
civ) Calculating expected dividend yield, capital gains yield and total return during the
first year:
Particulars Value
Current stock price 21.2

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Growth rate 6%
Dividend 2.00
Expected dividend yield (2*(1+6%))/21.2
Expected dividend yield 10.00%
Capital gains yield 6%
Total return during first year 10%+6%
Total return during first year 16.00%
Question THREE-Investment Decision Criteria/Capital Budgeting:
a) Calculating the Net Present Value and Internal Rate of Return:
a) Discount rate 23%:
Projected Cash flow Dis-rate Dis-cash flow
Year 0 $ -2,00,00,000.00 1.00 -2,00,00,000.00
Year 1
$
15,00,000.00 0.81 12,19,512.20
Year 2
$
32,78,000.00 0.66 21,66,699.72
Year 3
$
50,00,000.00 0.54 26,86,919.59
Year 4
$
64,50,000.00 0.44 28,17,988.84
Year 5
$
25,00,000.00 0.36 8,88,003.04
Year 6
$
25,00,000.00 0.29 7,21,953.69
Year 7
$
25,00,000.00 0.23 5,86,954.22
Year 8
$
25,00,000.00 0.19 4,77,198.55
Year 9
$
25,00,000.00 0.16 3,87,966.30
Year 10
$
25,00,000.00 0.13 3,15,419.76
Year 11
$
25,00,000.00 0.10 2,56,438.83

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Year 12
$
25,00,000.00 0.08 2,08,486.85
Year 13
$
25,00,000.00 0.07 1,69,501.51
Year 14
$
25,00,000.00 0.06 1,37,806.10
Year 15
$
25,00,000.00 0.04 1,12,037.48
Year 16
$
25,00,000.00 0.04 91,087.38
Year 17
$
25,00,000.00 0.03 74,054.78
Year 18
$
25,00,000.00 0.02 60,207.14
Year 19
$
25,00,000.00 0.02 48,948.89
Year 20
$
25,00,000.00 0.02 39,795.85
NPV $ -65,33,019.28
IRR 14.29%
No, the project will not be selected under the discount rate of 23%, as the NPV is
negative.
b) Discount rate 18%:
Projected Cash flow Dis-rate Dis-cash flow
Year 0 $ -2,00,00,000.00 1.00 -2,00,00,000.00
Year 1
$
15,00,000.00 0.85 12,71,186.44
Year 2
$
32,78,000.00 0.72 23,54,208.56
Year 3
$
50,00,000.00 0.61 30,43,154.36
Year 4
$
64,50,000.00 0.52 33,26,838.24
Year 5
$
25,00,000.00 0.44 10,92,773.04
Year 6
$
25,00,000.00 0.37 9,26,078.85

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Year 7
$
25,00,000.00 0.31 7,84,812.58
Year 8
$
25,00,000.00 0.27 6,65,095.41
Year 9
$
25,00,000.00 0.23 5,63,640.18
Year 10
$
25,00,000.00 0.19 4,77,661.17
Year 11
$
25,00,000.00 0.16 4,04,797.60
Year 12
$
25,00,000.00 0.14 3,43,048.81
Year 13
$
25,00,000.00 0.12 2,90,719.33
Year 14
$
25,00,000.00 0.10 2,46,372.32
Year 15
$
25,00,000.00 0.08 2,08,790.10
Year 16
$
25,00,000.00 0.07 1,76,940.76
Year 17
$
25,00,000.00 0.06 1,49,949.80
Year 18
$
25,00,000.00 0.05 1,27,076.10
Year 19
$
25,00,000.00 0.04 1,07,691.61
Year 20
$
25,00,000.00 0.04 91,264.08
NPV $ -33,47,900.66
IRR 14.29%
No, the project will not be selected under the discount rate of 18%, as the NPV is
negative.
c) Discount rate 10%:
Projected Cash flow Dis-rate Dis-cash flow
Year 0 $ -2,00,00,000.00 1.00 -2,00,00,000.00
Year 1 $ 15,00,000.00 13,63,636.36

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0.91
Year 2 $ 32,78,000.00 0.83 27,09,090.91
Year 3 $ 50,00,000.00 0.75 37,56,574.00
Year 4 $ 64,50,000.00 0.68 44,05,436.79
Year 5 $ 25,00,000.00 0.62 15,52,303.31
Year 6 $ 25,00,000.00 0.56 14,11,184.83
Year 7 $ 25,00,000.00 0.51 12,82,895.30
Year 8 $ 25,00,000.00 0.47 11,66,268.45
Year 9 $ 25,00,000.00 0.42 10,60,244.05
Year 10 $ 25,00,000.00 0.39 9,63,858.22
Year
11 $ 25,00,000.00 0.35 8,76,234.75
Year
12 $ 25,00,000.00 0.32 7,96,577.04
Year
13 $ 25,00,000.00 0.29 7,24,160.95
Year
14 $ 25,00,000.00 0.26 6,58,328.14
Year
15 $ 25,00,000.00 0.24 5,98,480.12
Year
16 $ 25,00,000.00 0.22 5,44,072.84
Year
17 $ 25,00,000.00 0.20 4,94,611.67
Year
18 $ 25,00,000.00 0.18 4,49,646.97
Year
19 $ 25,00,000.00 0.16 4,08,769.98
Year
20 $ 25,00,000.00 0.15 3,71,609.07
NPV $ 55,93,983.75
IRR 14.29%
The project will be selected under the discount rate of 10%, as the NPV is positive.

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Question FOUR Risk and Return:
a) Graphing the capital Allocation Line:
0 0.05 0.1 0.15 0.2 0.25
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
CAL Line
b) Indicating the fraction of investment in A, that will make the portfolio standard
deviation to 12%:
No of shares Share price Er Stdv Corr Rf Weight
DREXLA 1000 6 18% 22% 0.6 8% 20.00%
OGATO 4000 4 14% 20% 0.6 8% 80.00%
5000 100.00%
Portfolio Er (18%*20%) + (14%*80%)
Portfolio Er 14.800%
Portfolio Var
(((20%^2)*(22%^2)) + ((80%^2)*(20%^2)) +
(2*20%*80%*0.6*22%*20%))
Portfolio Var 3.60%
Portfolio Stdv √3.60%
Portfolio Stdv 18.97%