Financial Analysis: Risk, Return Estimation for Bega Cheese Ltd.

This finance project provides a comprehensive analysis of risk and return, focusing on Bega Cheese Ltd. The project begins with calculations of present value, revenue growth predictions, and effective annual rates (EAR) for different loan types. It then delves into monthly and quarterly repayment installments, and yield to maturity on bonds. The core of the project involves estimating risk and return using the Capital Asset Pricing Model (CAPM), calculating expected returns for Bega Cheese Ltd. and a hypothetical security, and constructing a portfolio. The project concludes with a discussion on risk and return analyses, comparing the performance of different investment options and the limitations of the CAPM model in real-world financial scenarios. The analysis incorporates concepts like beta, market risk premium, and risk-free rates to assess investment viability and portfolio diversification. The project aims to provide insights into financial decision-making under uncertainty.

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Table of Contents
Solution –A...........................................................................................................................................2
Solution –B............................................................................................................................................3
Solution –C............................................................................................................................................4
Solution –D...........................................................................................................................................4
Solution – E...........................................................................................................................................4
Solution –F............................................................................................................................................5
Risk and Return Estimation...................................................................................................................6
Risk and Return analyses.......................................................................................................................7
References............................................................................................................................................9
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Solution –A
Facts of the case
During current income year Bega Cheese Ltd, executed a long term sales contract,
such contract required the consumers to make a month payment, under such
arrangement Bega Cheese Ltd, stuck with current financial needs, to overcome from
such situation the financial management had made arrangement with banker of
company and bank is agree to pay present value future inflow, at 7 % discounting rate.
Here is a present value of amount realised from customers over a period of 4 years.
Months Payments (000) Dis Rate PV ( 000)
1 $ 10.00 0.9942 $ 9.94
2 $ 10.00 0.9885 $ 9.89
3 $ 10.00 0.9828 $ 9.83
4 $ 10.00 0.9771 $ 9.77
5 $ 10.00 0.9715 $ 9.71
6 $ 10.00 0.9659 $ 9.66
7 $ 10.00 0.9603 $ 9.60
8 $ 10.00 0.9548 $ 9.55
9 $ 10.00 0.9493 $ 9.49
10 $ 10.00 0.9438 $ 9.44
11 $ 10.00 0.9384 $ 9.38
12 $ 10.00 0.9330 $ 9.33
13 $ 10.00 0.9276 $ 9.28
14 $ 10.00 0.9222 $ 9.22
15 $ 10.00 0.9169 $ 9.17
16 $ 10.00 0.9116 $ 9.12
17 $ 10.00 0.9064 $ 9.06
18 $ 10.00 0.9011 $ 9.01
19 $ 10.00 0.8959 $ 8.96
20 $ 10.00 0.8908 $ 8.91
21 $ 10.00 0.8856 $ 8.86
22 $ 10.00 0.8805 $ 8.81
23 $ 10.00 0.8755 $ 8.75
24 $ 10.00 0.8704 $ 8.70
25 $ 10.00 0.8654 $ 8.65
26 $ 10.00 0.8604 $ 8.60
27 $ 10.00 0.8554 $ 8.55
28 $ 10.00 0.8505 $ 8.51
29 $ 10.00 0.8456 $ 8.46
30 $ 10.00 0.8407 $ 8.41
31 $ 10.00 0.8359 $ 8.36
32 $ 10.00 0.8311 $ 8.31
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33 $ 10.00 0.8263 $ 8.26
34 $ 10.00 0.8215 $ 8.21
35 $ 10.00 0.8168 $ 8.17
36 $ 10.00 0.8120 $ 8.12
37 $ 10.00 0.8074 $ 8.07
38 $ 10.00 0.8027 $ 8.03
39 $ 10.00 0.7981 $ 7.98
40 $ 10.00 0.7935 $ 7.93
41 $ 10.00 0.7889 $ 7.89
42 $ 10.00 0.7844 $ 7.84
43 $ 10.00 0.7798 $ 7.80
44 $ 10.00 0.7753 $ 7.75
45 $ 10.00 0.7709 $ 7.71
46 $ 10.00 0.7664 $ 7.66
47 $ 10.00 0.7620 $ 7.62
48 $ 10.00 0.7576 $ 7.58
$ 480.00 $ 417.93
The present value of all amount realised during the period of four years would be $
417.93. Hence bank can maximum pay $ 417.93.
Solution –B
Predication in growth of operating revenue in 5 years
Revenue Growth End Amount
7.40%
0 1438.28
1 1438.28 106.43 1544.71
2 1544.71 114.31 1659.02
3 1659.02 122.77 1781.79
4 1781.789 131.85 1913.64
5 1913.6414 141.61 2055.25
Growth in sales over a period of 5 years at the rate of 7.40 % would be $ 7889.04
(millions)
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Solution –C
Type Loam Formula for EAR Computation (%)
Loan – A ( Sami- annually
)
(1+ interest )n – 1/
Compound numbers
( 1+ 0.07)2 -1 = 7.12
2
Loan- B ( monthly ) (1+ interest )n – 1/
Compound numbers
(1 +0.069)12 -1 = 7.12
12
Loan – C ( quarterly ) (1+ interest )n – 1/
Compound numbers
( 1 + 0.070)4 -1 = 7.19
4
Solution –D
Fact of the case:
Monthly and Quarterly repayment instalments.
For such arrangement the monthly payment of the over a 10 years are as follows.
Loan amount = $ 811,000 (Value of the property)
APR = 3.80
Term = 10 years
Equal Monthly instalments is $22586, and Quarterly Payments would be $ 67404.13
Solution – E
Yield to maturity on bond on approximate bases
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The bond are issue for the 8 years and the current market price is $ 117.00, where the
face value of the bond are 100, with the compound interest rate is 5.60 %
C = 5.60 %
F = 100
P = 117.00
N = 8 years
YTM = C + F-P / N
F + P / 2
= $ 5.60 + 100 -117. / 8 years
100 + 117 / 2
= $ 3.475
$ 108.5
= 3.20 %
Solution –F
Face value of bond is $ 1000 and interest payment on same would be 7 % Sami-
annually that mean rate of interest would be 3.50 %, here is a formula.
= Face value X r/ n
Here face value is $ 1000 and annual compounding interest rate are 7 % with semi-
annual bases.
= $ 1000 X 7 % / 2
$ 35
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Risk and Return Estimation
I) Bega Cheese Limited Computation of Expected rate of return
CAPM Model
Err = Risk free rate + Beta (Expected return from the market – Risk free rate)
Here Risk free rate = 10-year Australian Government bond, this rate as on 19.04.2019
is 1.98 %.
Market Risk Premium would be 6 %.
Beta of Boral Limited during last 5 years was 1.14
Computation of Expected return
ER = 1.98% + 0.86(6 % - 1.98 %)
= 1.98 % + 3.46 %
= 5.44 %
II) Second security which we have selected here is Hypothecated security having
a beta of 0.20
Err = Risk free rate + Beta (Expected return from the market – Risk free rate)
= 1.98 % + (-0.20) (6 % - 1.98 %)
= 1.18 %
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A) Computation of expected return from the portfolio
Particulars ER as per CAPM Weight Portfolio Return
Bega Chasse Ltd 5.44 % 0.50 2.72 %
Hypothetical
Company
1.18 % 0.50 0.59 %
TOTAL 3.31%
Risk and Return analyses
An investors primarily analysis the investment option bases on the theory risk and
return theory, in security market the investment instruments having high volatility rate
eventuality produced the comparative high return than the instruments having the low
volatility or price sensitivity rate. There are numbers of theatrical model to analysing
investment option, in term of expected return and the risk associated with such
instruments. (Vaidya, D. (2019).
Out of all one of the popular risk analysis instruments is a CAPM model, which
summaries the performance of investment options in term of expected return higher or
lower than the market risk free return.
The CAPM model considers the simplified words here with
A) The transaction has no transection cost or no taxes
B) All investors has a identified investment horizons
C) All investors have a clear and identified options for the expected returns,
volatility and correlations of available investments.
The model of CAPM helps in formulating effective portfolio which has due weightage
to the risk and return. The core elements of the model is beta, which indicate the risk
associated with the security and expected rate of returns. Further the model also gives
a sufficient weightage to the concept of risk and return, as such the concept of risk and
return states that a both the factors moves in the same directors, that means the
instruments having high risk shows the potentiality of high return and adverse
situation is noted in case of investment instrument having low risk or volatility rate.
(Freelancer Portal. (2019).
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Here in current case we have selected two type of securities one is of Bega Cheese
Limited, while another one has a less or negative volatility rate, such combination can
create an attractive portfolio for those investors who believes in average return ad who
are not willing to take more risk.
The beta of Bega Cheese Limited is 0.86 which is less than the one, which simply
indicates that such instruments has a low risk and sensitively hence comparative return
from such security is lower than what we are earning from the aggressive security.
Further the portfolio formulated can generate a return which are near to the risk free
security., while analysis the security of Bega Chasse one thing is clear that a security
of Bega Cheese can create a wealth which is near to the risk free rate, further second
instrument of our portfolio has a negative beta, which does means that such instrument
cannot generate wealth in long term and the actual return from such security are near
to the risk free rate of return or it may be lower than the risk free rate, as the volatility
rate of such instrument is negative and seems like a dead stock. (Capital Asset Pricing
Model (CAPM). (2019).
Conclusion
The CAPM theory furnished the information and analysis tools which are theoretically
possible but in real life or in current security market the expected and actual return
from the securities are influence by numbers of internal and external business
environment factors, so while using the model of CAPM we have to consider the fact
about the actual and projected variation in return from the various investment
instrument, to model give a sufficient information about the risk and aggressive nature
of security but in practical life such factors are ignores. Here in current case our
selected both the instrument owning a lower risk rate as a result of which actual return
is also near to the risk free security.
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References
Capital Asset Pricing Model (CAPM). (2019). Retrieved from
https://www.investopedia.com/terms/c/capm.asp
Capital Asset Pricing Model (CAPM) in Security Analysis and Investment
Management Tutorial pdf - Capital Asset Pricing Model (CAPM) in Security
Analysis and Investment Management (11358) | Wisdom Jobs. (2019).
Retrieved from https://www.wisdomjobs.com/e-university/security-analysis-
and-investment-management-tutorial-356/capital-asset-pricing-model-capm-
11358.html
Freelancer Portal. (2019). Retrieved from
https://www.infinizifl.com/dashboard/orderDetail.php?id=19041263054976
Spaulding, W. (2019). Beta, Capital Asset Pricing Model (CAPM), and the
Security Market Line (SML). Retrieved from
https://thismatter.com/money/investments/capital-asset-pricing-model.htm
Vaidya, D. (2019). CAPM Beta - Definition, Formula, Calculate Beta in Excel.
Retrieved from https://www.wallstreetmojo.com/capm-beta-definition-
formula-calculate-beta-in-excel/
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