Financial Management Assignment for University Students

This document presents a comprehensive solution to a financial management assignment, addressing key areas such as dividend calculations, including payout ratios and growth rates, and the present value of dividends. It delves into the present value of perpetuities, considering both constant and growing fees, and explores effective interest rates and loan amortization schedules. The assignment further examines capital budgeting techniques, comparing payback periods and net present values of different investment projects, and provides an analysis of bond valuation, including the impact of yield rate changes. Finally, it assesses the financial implications of investing in new technology, calculating net operating cash flows and net present value to determine the investment's viability. The solution includes detailed calculations and analysis across all sections.

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

1FINANCIAL MANAGEMENT
Table of Contents
Answer to Question 1:.....................................................................................................................3
Answer 1.a:..................................................................................................................................3
Answer 1.b:..................................................................................................................................3
Answer to Question 2:.....................................................................................................................4
Answer to Question 2.a:..............................................................................................................4
Answer a.i:...............................................................................................................................4
Answer a.iii:.............................................................................................................................4
Answer to Question 2.b:..............................................................................................................5
Answer b.i:...............................................................................................................................5
Answer b.ii:..............................................................................................................................5
Answer b.iii:............................................................................................................................6
Answer b.iv:.............................................................................................................................7
Answer b.v:..............................................................................................................................7
Answer to Question 3:.....................................................................................................................7
Answer to Question 3.a:..............................................................................................................7
Answer a.i:...............................................................................................................................7
Answer a.ii:..............................................................................................................................8
Answer a.iii:.............................................................................................................................9
Answer a.iv:...........................................................................................................................10

2FINANCIAL MANAGEMENT
Answer a.v:............................................................................................................................11
Answer to a.vi:.......................................................................................................................11
Answer to Question 3.b:............................................................................................................11
Answer b.i:.............................................................................................................................11
Answer b.ii:............................................................................................................................12
Answer b.iii:..........................................................................................................................12
Answer to Question 4:...................................................................................................................12
Answer to Question 4.a:............................................................................................................12
Answer to Question 4.b:............................................................................................................14
Reference & Bibliography:............................................................................................................15

3FINANCIAL MANAGEMENT
Answer to Question 1:
Answer 1.a:
Particulars Amount
Payout Ratio A 70%
Share of W.Brown B 12%
Growth Rate of Net Profit C 25%
Interest Rate p.a. D 9%
Net profit after tax on '16-
17 D $600,000
Total Dividend Paid on '16-
17 E=DxA $420,000
Dividend Received on '16-
17 F=ExB $50,400
Net profit after tax on '17-
18 H=D*(1+C) $750,000
Total Dividend on '17-18 I=HxA $525,000
Dividend Receivable on '17-
18 J=IxB $63,000
PV of Dividends on '17-18 K=J/(1+D)^1 $57,798
Fund Required on '17-18 L $100,000
PV of Fund Required
M=L/
(1+D)^1 $91,743
Consumption in August'17 N=F-(M-K) $16,455
Answer 1.b:
Periods
Particulars 0 1 2 3 4
t0 t1 t2 t3 t4
Dividend Growth Rate 0% 20% 15% 10% 5%

4FINANCIAL MANAGEMENT
g0 g1 g2 g3 g4
Required Rate of Return 12% 12% 12% 12% 12%
r0 r1 r2 r3 r4
Dividend
$1.2
0 $1.44 $1.66 $1.82 $1.91
D0 D1=D0x(1+g1) D2=D1x(1+g2) D3=D2x(1+g3) D4=D3x(1+g4)
PV of Dividends for Unstable
Period $1.29 $1.32 $1.30
P1=D1/(1+r1)^t1 P2=D2/(1+r2)^t2 P3=D3/(1+r3)^t3
Terminal Value of Perpetuity $27.32
T=D4/(r4-g4)
PV of Terminal Value $17.36
P4=T/(1+r4)^t4
Expected Selling of Stocks
on August,2017 $21.27
F=P1+P2+P3+P4
Answer to Question 2:
Answer to Question 2.a:
Answer a.i:
Particulars Amount
Total Perpetual Scholarship p.a. A $50,000
Required Rate of Return p.a. B 5%
Present Value of Perpetuity in
2020 C=A/B $1,000,000
Deferred Period D 3
Present Value of Income
Stream on 2017 E=C/(1+B)^(D-1)
$907,029.4
8

5FINANCIAL MANAGEMENT
Answer a.iii:
Particulars Amount
Total Perpetual Scholarship
p.a. A $50,000
Required Rate of Return p.a. B 5%
Growth rate of Fees p.a. C 3%
Present Value of Perpetuity in
2020 D=A/(B-C) $2,500,000
Deferred Period E 3
Present Value of Income
Stream on 2017 F=D/(1+B)^(E-1)
$2,267,573.7
0
Answer to Question 2.b:
Answer b.i:
Particulars Amount
Interest Rate p.a. A 7.80%
Compounding Period p.a. B 12
Effective Annual Interest Rate
p.a. C=[(1+A/B)^B]-1 8.08%
Answer b.ii:
Particulars Amount
Loan Amount A $540,000
Effective Annual Interest Rate
p.a. B 8.08%
Compounding Period p.a. C 12
Total Period (in years) D 20

6FINANCIAL MANAGEMENT
Effective Annual Interest Rate
per month E=B/C 0.67%
Total nos. of Repayments F=BxD 240
Amount of Monthly Repayment G=(AxE)/[1-(1+E)^-F] $4,545.38
Answer b.iii:
Particulars Amount
Initial Loan Amount A $540,000
Effective Annual Interest Rate
per month B 0.67%
Compounding Period p.a. C 12
FV of Loan after first 12 months D=Ax[(1+B)^C] $585,313.62
Monthly Repayments in first 12
months E $3,300
FV of Total Repayments in first
12 months F=Ex[{(1+B)^C}-1]/B $41,100.88
Balance of Loan after first 12
months G=D-F $544,212.73
FV of Balance Loan in next 12
months H=Gx[(1+B)^C] $589,879.86
Monthly Repayments in Next 12
months I $3,750
FV of Total Repayments in next
12 months J=Ix[{(1+B)^C}-1]/B $46,705.55
Balance of Loan after next 12
months K=H-J $543,174.31
Total nos. of Repayments L 240
Balance nos. of Repayments M=L-(Cx2) 216

7FINANCIAL MANAGEMENT
Amount of Monthly Repayments
from 3rd Year Onwards
N=(BxK)/[1-(1+B)^-
M] $4,780.53
Answer b.iv:
Particulars Amount
Initial Loan Amount A $540,000
Effective Annual Interest Rate
per month B 0.67%
Interest Due on first month C=AxB $3,638.24
Monthly Repayments D $2,500
Interest Due E=C-D $1,138.24
It is clear from the table, by paying monthly installments of $2500, Ron and Robin would
not be able to cover the full interest amount for the first month. As the result, the due interest
would be added with the principal amount in the next month and subsequently increase the
amount of interest in the next month. In this manner, the principal amount would increase in
every month and can never be repaid fully with the monthly installment of $2500.
Answer b.v:
From the above discussion, it can be stated that as the loan cannot be repaid with the
monthly payment of $2500, there would be no final repayments.

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Answer to Question 3:
Answer to Question 3.a:
Answer a.i:
If it is assumed that the cash flows have occurred in the mid of every year after period 0,
then payback periods of the two investments would be as follows:
Investment X Investment Y
Period Period
Particulars 0 0.5 1.5 2.5 0 0.5 1.5 2.5
t0 t1 t2 t3 t0 t1 t2 t3
Cash Flows -40000 12000 18000 27000 -40000 18000 18000 18000
C0 C1 C2 C3 C0 C1 C2 C3
Cumulative Cash Flow -40000 -28000 -10000 17000 -40000 -22000 -4000 14000
CC0 CC1 CC2 CC3 CC0 CC1 CC2 CC3
Payback Period (in years) 1.87 1.72
P=t2+(-CC2/C3) P=t2+(-CC2/C3)
From the table, it is clear that Investment Y would have lesser payback period than
Investment X and hence, it should be selected for investment purpose.
Answer a.ii:
If the cash flows occurred at the end of each period, then the payback periods would
surely differ from the above answer. The payback periods for this alternative scenario are
calculated below:
Investment X Investment Y
Period Period
Particulars 0 1 2 3 0 1 2 3
t1 t2 t3 t4 t1 t2 t3 t4
Cash Flows -40000 12000 18000 27000 -40000 18000 18000 18000
C1 C2 C3 C4 C1 C2 C3 C4

9FINANCIAL MANAGEMENT
Cumulative Cash Flow -40000 -28000 -10000 17000 -40000 -22000 -4000 14000
CC1 CC2 CC3 CC4 CC1 CC2 CC3 CC4
Payback Period (in years) 2.37 2.22
P=t3+(-CC3/C4) P=t3+(-CC3/C4)
The table denotes that the payback periods for both the project would extend for further
0.5 years. However, in this scenario also, Investment Y would recover the initial investment
faster than Investment X and therefore, it would be better to select investment Y.
Answer a.iii:
NPV is calculated on the basis of present vales of future cash flows, which, in turn, are
ascertained with the help of discount rate. The discount rate is generally the required rate of
return or the cost of capital for any investment. In this case, no such rates have been mentioned
in the case study. Hence, it is not possible to draw any graph for comparing the NPV of the two
projects (Mukherjee and Al Rahahleh 2013).
However, the net cash flows, generated from the two projects are calculated and shown in
the graph below to compare the two investments:
Investment X Investment Y
Period Period
Particulars 1 2 3 4 1 2 3 4
t1 t2 t3 t4 t1 t2 t3 t4
Cash Flows -40000 12000 18000 27000 -40000 18000 18000 18000
C1 C2 C3 C4 C1 C2 C3 C4
Net Cash Flow 17000 14000
NPV = C1+C2+C3+C4 NPV = C1+C2+C3+C4

10FINANCIAL MANAGEMENT
Investment X Investment Y
0
5000
10000
15000
20000
Net Cash Flow
Net Cash Flow
Investments
Net Cash Flows
Answer a.iv:
Investment X Investment Y
Period Period
Particulars 1 2 3 4 1 2 3 4
t1 t2 t3 t4 t1 t2 t3 t4
Cash Flows -40000 12000 18000 27000 -40000 18000 18000 18000
C1 C2 C3 C4 C1 C2 C3 C4
IRR 17% 16.6%
It should be noted that IRR is mainly computed on the basis of discount rate, which is not
given in the case study. However, it can also be ascertained from the undiscounted cash flows,
though the outcomes are not reliable under this technique (Abor 2017).

11FINANCIAL MANAGEMENT
Answer a.v:
1 2 3 4
-50000
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
Crossover Point
Investment X
Investment Y
Axis Title
Answer to a.vi:
Required rate of return is determined on the basis of return rates of similar investments.
Cost of capital can also be used as the required rate of return. However, in this case study, no
such information has been given in regards to return rate of similar investments or cost of capital.
Hence, the investments cannot be compared depending on the required rate of return (Burns and
Walker 2015).
Answer to Question 3.b:
Answer b.i:
Particulars Bond 1 Bond 2
Face Value A $100,000 $100,000
Coupon Rate p.a. B 6% 6%
Nos. of Coupon Payment
p.a. C 2 2
Coupon Payment D=(AxB)/C $3,000 $3,000
Increase in Yield Rate E 2% 2%
Current Yield Rate p.a. F=B+E 8% 8%
Cuurent Half-Yearly Yield
Rate G=F/C 4% 4%