Accounting and Financial Management Assignment Solution

This finance assignment solution covers several key areas of financial management and accounting. The assignment begins by differentiating between primary and secondary market transactions and explaining the importance of ratio analysis for managers, business owners, and shareholders. It then delves into calculating real rates of return and expected returns on treasury securities, considering inflation and maturity risk premiums. The solution includes detailed calculations for various scenarios, including yields on corporate bonds. Furthermore, the assignment addresses the calculation of Economic Value Added (EVA) and bond valuation, providing step-by-step solutions for these financial metrics. The solution demonstrates the application of financial concepts and formulas to solve practical problems, offering a comprehensive understanding of financial analysis.

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

1ACCOUNTING AND FINANCIAL MANAGEMENT
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
Question 3........................................................................................................................................2
Question 4........................................................................................................................................5
Question 5........................................................................................................................................5
Question 6........................................................................................................................................6

2ACCOUNTING AND FINANCIAL MANAGEMENT
Question 1
A)
i) Secondary Market Transaction
ii) Primary Market Transaction
iii) Secondary Market Transaction
b) Ratio analysis is a key quantitative assessment tool which helps in the better assessment of the
financial performance and position of the company. It helps the managers of the company review
the efficiency and utilisation of the assets and resources with the help of the efficiency ratio and
operating ratios.
Question 2
a) Real Return: (1+Nominal Rate)/(1+Inflation Rate).
Real Return: (1+7%)/(1+3.20%)
Real Return: 3.682%.
b) r = r* + IP + DRP + LP + MRP
r = 2.50% + 4.10% = 6.60%
Question 3
i) The average expected inflation over the next four year will be as follows:

3ACCOUNTING AND FINANCIAL MANAGEMENT
Average Expected Inflation: (2%+2%+2%+4%)/4
Average Expected Inflation: 2.5%
ii) Yield on a 4 Year Treasury Yield
r = r* + IP + MRP + LP.
r = Real risk-free rate + Inflation premium + Default risk premium + Liquidity premium
r* = 0.03. IP = (2%+2%+2%+4%)/4: 2.5%
Maturity Risk Premium: to 0.1 x t -1 %
MRP: 0.01(7-1)% = 0.01(6%) = 0.0006
LP: 0%
rt7: 0.03+0.025+0.0006:5.506%.
iii) Yield on a 4 Year BBB rated corporate yield:
r = r* + IP + MRP + DRP + LP.
r = Real risk-free rate + Inflation premium + Default risk premium + Liquidity premium
r* = 0.03. IP = (2%+2%+2%+4%)/4: 2.5%
Maturity Risk Premium: to 0.1 x t -1 %
MRP: 0.01(7-1)% = 0.01(6%) = 0.0006
DRP: 1.3%
LP: 0.5%
rt7: 0.03+0.025+0.013+0.0006+0.5%: 7.366%.

4ACCOUNTING AND FINANCIAL MANAGEMENT
iv) Yield on 8-Year Treasury Bond:
r*: 0.03
IP: (2%+2%+2%+(4%*5))/8: 3.25%
Maturity Risk Premium: to 0.1 x t -1 %
MRP: 0.01(8-1)% = 0.01(7%) = 0.0007
DRP: NA%
LP: 0%
Rt8: 0.03+0.0325+0.0007: 6.32%.
v) Yield on a 8 Year BBB rated corporate yield:
r*: 0.03
IP: (2%+2%+2%+(4%*5))/8: 3.25%
Maturity Risk Premium: to 0.1 x t -1 %
MRP: 0.01(8-1)% = 0.01(7%) = 0.0007
DRP: 1.3%
LP: 0.5%
Rt8: 0.03+0.0325+0.0007+0.013+0.5%: 8.12%.

5ACCOUNTING AND FINANCIAL MANAGEMENT
vi) If the yield on a 9-Year Treasury bond is around 7.3% which is comparatively greater than
the determined rate of 6.84% it clearly states that the inflation rate will be higher than 4% in the
analysed period.
IP: (2%+2%+2%+(4%*6))/9: 3.75%
Maturity Risk Premium: to 0.1 x t -1 %
MRP: 0.01(9-1)% = 0.01(9%) = 0.0009
DRP: NA%
LP: 0%
Rt8: 0.03+0.0375+0.0009: 6.84%.
Question 4
Revenue $22.5mn,
Operating Cost:$18mn
Operating income: $ 4.5mn
Capital: $15mn EVA=EBIT(1-Taxes rate) – [Capital*WACC] EVA =$ 4,500(1-0.35) – ($
15,000,000*0.09) EVA= $1,575,000.
Question 5
Question 5 a
Present Value $ 1,040.00
Face Value $ 1,000.00

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Coupon Amt $ 65.00
Maturity 15
Yield to Maturity 6.086%
Question 5 b
Present Value $ 1,130.00
Face Value $ 1,000.00
Coupon Amt $ 83.06
Maturity 12
Yield to Maturity 6.695%
Question 6
a)
Question 6 a
Dividends Year 0 1 2 3 4 5
Dividend
Amt.
$
1.25
$
1.35
$
1.46
$
1.57
$
1.64
$
1.70
Growth Rate 8% 8% 8% 4% 4%
b) rp= $7/$140 = 5.00%
Question 6 b
Par Value 100
Market Value 140
Dividend 7%
Return 5.00%