Financial Management C305 Assignment Solution - University Name

This document presents a comprehensive solution to a financial management assignment, addressing key concepts in business finance. The assignment covers the time value of money, including present value calculations, effective annual interest rates, and loan amortization. It also delves into bond valuation, constant growth models for stock valuation, and the valuation of a pension fund. Capital budgeting techniques are explored, including net present value, internal rate of return, and payback period analysis. Finally, the assignment includes a risk and return analysis, examining stock returns, standard deviations, and portfolio analysis. The solution demonstrates the application of various financial formulas and calculations to real-world scenarios, providing a detailed understanding of financial management principles.

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

1FINANCIAL MANAGEMENT
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................3
Question 3........................................................................................................................................4
Question 4........................................................................................................................................5
Question 5........................................................................................................................................7
Bibliography....................................................................................................................................8

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Question 1
a) The present value of a security that will pay $5,000 in 20 years if securities of equal risk pay
7% annually then the same would be as follows:
a) Present Value
PMT 5000
Time 20
Discount Rate 7%
Present Value ($52,970.07)
b) Contract Evaluation
Particulars Year 1 Year 2 Year 3 Year 4 NPV
Contract A 55,000 55,000 55,000 55,000
$174,342.6
0
Contract B 55,000 56,000 58,000 60,000
$180,838.0
6
Contract C 80,000 40,000 50,000 50,000
$177,501.5
4
Contract B would be selected based on the higher Net Present Value generated by the Contract.
c) Lottery Prize Evaluation
c) Lottery Prize
Particulars
Present
Value Tenure
Lump Sum 61mn 1
End Of Year
Payment 9.5 mn 10
End Of Year
Payment 5.5 mn 30
i) 7% annually
Particulars
Present
Value Tenure
Present
Value
Lump Sum 61,000,000 1
($61,000,000
)

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End Of Year
Payment 9500000 10
($66,724,025
)
End Of Year
Payment 5500000 30
($68,249,727
)
In the first case where required return would be 7% annually the third option will be selected
ii) 9% annually
Particulars
Present
Value Tenure
Present
Value
Lump Sum 61,000,000 1
($61,000,000
)
End Of Year
Payment 9500000 10
($60,967,748
)
End Of Year
Payment 5500000 30
($56,505,097
)
In the second case where interest payment would be 9% annually the first option will be selected
Question 2
a) Effective Annual Interest
a) Nominal Interest Rate 12%
Frequency Monthly 12
Effective Annual Interest Rate 12.68%
b) Loan Amortisation
b) Loan Amortization
Dollar Amount of Each Payment
Principal 500,000
Monthly Interest Rate 0.95%
Payment Per Month
Principal 1388.89

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Interest 4744.40
Total Monthly Payment 6133.29
a) The dollar amount of each monthly payment would be around $6133
b) The interest amount in the first payment would be around $ 4744
c) Repayment of Principle in the first payment would be around $ 1388.89
c) Present Value of Annuity
c) Present Value of Annuity
Quarterly Deposit 50,000
Time Period 10
Periodic Payment 4
Interest Rate Annually 12%
Interest Rate Semi-Annually 12.36%
Interest Compounded
Quarterly 3.09%
Present Value
($1,139,107
)
Question 3
a) Valuation of Bond
a) Bond Valuation
Year to Maturity Price of Bond Z
5 ($1,000.00)
3 ($1,000.00)
1 ($1,000.00)
0 ($1,000.00)
Face Value 1000
Yield to Maturity 10%
Time 5

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b) Constant Growth
b) Constant Growth
Dividend 0.5
Constant Growth Rate 7%
Required Return 12%
Present Value of Stock 10
Future Value of Dividend Year 1 Year 2 Year 3 Year 4
Dividends 0.5 0.54 0.57 0.61
Value of Stock 10 10.54 11.11 11.72
The value of stock in four year of time would be $11.72
c)
c) Pension Fund Manager
Free Cash Flows 1 2 3 4
Terminal
Value
Cash Flows 3000000 6000000 10000000 15000000 321000000
i) Present Value of Free Cash Flows
Discount Factor 0.89 0.80 0.71 0.64
Discounted Cash Flows 2678571 4783163 7117802 9532771
Total Value 24112308
ii) Value of Ted Today
Discount Factor 0.89 0.80 0.71 0.64
Discounted Cash Flows 2678571 4783163 7117802
21353407
4
Total Value 228113612
iii) Estimated Share Price
Total Value/Outstanding Share 22.81

6FINANCIAL MANAGEMENT
Question 4
a) Capital Budgeting
Capital Budgeting
Particulars Year 0 Year 1 Year 2 Year 3
Initial Investment -108000
Installation Cost -12500
Scrap Value 60000
Working Capital -5500 5500
Pre-Tax Labor Cost
44,00
0
44,00
0 44,000
Depreciation Tax Shield 21175 21175 21175
Cash Flows -126000 65175 65175 130675
Discount Factor 0.89 0.80 0.71
Discounted Cash Flows -126000 58192 51957 93012
Net Present Value 77161
Internal Rate of Return 26%
Payback Period
Cash Flows -126000 65175 65175 130675
Cash Flows Recovered
-
60825 4350
Payback Period in Years 1 0.93
Total Payback in Years 1.93
Discounted Payback Period
Discounted Cash Flows -126000 58192 51957 93012
Cash Flows Recovered
-
67808
-
15851 77161
Payback Period in Years 1 2 0.17
Total Payback in Years 2.17

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8FINANCIAL MANAGEMENT
Question 5
Risk and Return Analysis
Risk and Return
Year Stock Y's Return
Stock Z'
Return
2014 -18.0% -15.0%
2015 33.0% 22.0%
2016 15.0% 30.5%
2017 -1.0% -8.0%
2018 25.0% 27.0%
Avg. Return 10.8% 11.3%
Standard Dev. 18.3% 18.9%
Coefficient 169.77% 167.62%
Portfolio Analysis
Return 11.00%
(Weights Given 60% to Stock Y and 40% to Stock Z)
Standard Deviation
7%
SD 26%

9FINANCIAL MANAGEMENT
Bibliography
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central
and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Johari, M., Hosseini-Motlagh, S.M., Nematollahi, M., Goh, M. and Ignatius, J., 2018. Bi-level
credit period coordination for periodic review inventory system with price-credit dependent
demand under time value of money. Transportation Research Part E: Logistics and
Transportation Review, 114, pp.270-291.
Lima, A.C., da Silveira, J.A.G., Matos, F.R.N. and Xavier, A.M., 2017. A qualitative analysis of
capital budgeting in cotton ginning plants. Qualitative Research in Accounting & Management,
14(3), pp.210-229.
Muda, I. and Hasibuan, A.N., 2018. Public Discovery of the Concept of Time Value of Money
with Economic Value of Time. In Proceedings of MICoMS 2017 (pp. 251-257). Emerald
Publishing Limited.