Assessment 2: Financial Management and Investment Decisions

Desklib provides past papers and solved assignments for students. This finance report analyzes JB HiFi's financial performance.

FINANCE - ASSESSMENT 2
1

Table of Contents
Introduction....................................................................................................................................3
Question 1.......................................................................................................................................4
Question 2.....................................................................................................................................11
Question 3.....................................................................................................................................12
References.....................................................................................................................................13
2

Introduction
The given project report aims to throw light on the aspects of financial management. Important
aspects of financial management have been discussed thoroughly in this report. The report has
been divided into three parts. For the better understanding of the concepts, these parts have been
divided into sub-parts. Concepts such as time value of money, present value of securities along
with risk and return of the concerned securities. Since, beta of a listed company can be computed
easily, company listed on Australian Stock exchange, namely, JB HiFi with the code ‘JBH’ have
been considered.
3

Question 1
a.
There are 48 period or installments for which equal installment will be made. However, it is not
necessary that the amount of principal or interest is equal. As such, the principal and interest
component will be different. For computing the discount factor, effective interest rate will be
determined which comes out to be 0.58%. Accordingly, discount factors will be determined for
48 periods and which will be added to arrive at the annuity factor. This annuity factor will be
multiplied so that present value of loan installment can be determined.
Installment
DCF @
0.58% Present Value
32.9 0.994 32.7026
32.9 0.989 32.5381
32.9 0.983 32.3407
32.9 0.977 32.1433
32.9 0.971 31.9459
32.9 0.966 31.7814
32.9 0.96 31.584
32.9 0.955 31.4195
32.9 0.949 31.2221
32.9 0.944 31.0576
4

32.9 0.938 30.8602
32.9 0.933 30.6957
32.9 0.928 30.5312
32.9 0.922 30.3338
32.9 0.917 30.1693
32.9 0.912 30.0048
32.9 0.906 29.8074
32.9 0.901 29.6429
32.9 0.896 29.4784
32.9 0.891 29.3139
32.9 0.886 29.1494
32.9 0.881 28.9849
32.9 0.875 28.7875
32.9 0.87 28.623
32.9 0.865 28.4585
32.9 0.86 28.294
32.9 0.855 28.1295
5

32.9 0.851 27.9979
32.9 0.846 27.8334
32.9 0.841 27.6689
32.9 0.836 27.5044
32.9 0.831 27.3399
32.9 0.826 27.1754
32.9 0.821 27.0109
32.9 0.817 26.8793
32.9 0.812 26.7148
32.9 0.807 26.5503
32.9 0.803 26.4187
32.9 0.798 26.2542
32.9 0.793 26.0897
32.9 0.789 25.9581
32.9 0.784 25.7936
32.9 0.78 25.662
32.9 0.775 25.4975
6

32.9 0.771 25.3659
32.9 0.766 25.2014
32.9 0.762 25.0698
32.9 0.758 24.9382
Total 1374.92
Thus, at the end of 4 years JB HiFiwill receive $ 1374.92.
b.
Amount ($) Growth Rate Cumulative Amount
($)
6854.3 15.30% 7903.01
7903.01 15.30% 9112.17
9112.17 15.30% 10506.33
10506.33 15.30% 12113.80
12113.80 15.30% 13967.21
Cumulative or total operating revenue will be $13967.21 in the period of 5 years assuming that
the growth rate is constant at 15.30% annually.
7

c.
Loan A
I = [1+(r/n)] ^ (n-1)
In the above formula,
R = annual interest rate,
N = No. of compounding in a year,
I = [1+ (0.043/2)]^(2-1)
I = 4.30%approximately
Loan B
I = [1+(r/n)]^(n-1)
In the given case, interest rate will be
I = [1 + (0.0425/4)] ^(4 – 1)
I = 4.32%
Loan C
I = [1+(r/n)] ^ (n-1)
In the given case, R = 4.24%, N = 365
Substituting the values, effective interest rate will be determined:
I = [1+ (0.0424/365) ^(365-1)
I = 4.33%
8

Particular
s
Compounding
Freq. n Rate=i i/n (1+i/n) (1+i/n)^n (1+i/n)^n-
1 EAR
Loan A semi-annually 2 4.26% 0.0213 1.02 1.04 0.04 4.30%
Loan B quarterly 4 4.25% 0.010625 1.01 1.04 0.04 4.32%
Loan C daily 365 4.24% 0.000116 1.00 1.04 0.04 4.33%
Type of
loan EAR
A 4.30%
B 4.32%
C 4.33%
Thus, it can be said that Loan A has the least Effective Interest rate. Thus, it is advisable for the JB HiFi to
select loan A as it will reduce the related interest cost (Vanneste, et.al., 2015).
d.
Here, cost of Property = $619000 and the effective Interest Rate = 3.854%.
Since, the no. of compounding is 12,effective monthly interest rate will be 0.3211% (3.854/12).
Monthly installment = Cost of the asset/ Annual factor
= 619000/ 99.454
= 6223.98
Accordingly, the quarterly payment =18671.95 (6223.98*3).
e.
Particulars Amount
Par Value 100
Number of Years to Maturity 8
Annual Coupon Rate 5.90%
Current Price 98.95
YTM 6.06%
9

YTM= 5.90+ (100-98.95/8)/(100+98.95)/2
= 6.06%
In the given case, YTM is the rate which considers the cash flows. There are many ways to
compute the YTM. However, YTM has been determined using the short-cut method.
f.
Year
Coupon
Amount
PVF @
2.45%
Present
Value
1 35 0.976 34.16
2 35 0.953 33.34
3 35 0.930 32.55
4 35 0.908 31.77
5 35 0.886 31.01
6 35 0.865 30.27
7 35 0.844 29.54
8 35 0.824 28.84
9 35 0.804 28.15
10 35 0.785 27.48
11 35 0.766 26.82
12 35 0.748 26.18
Total 360.09
10

Question 2
a.
Particulars Company (Hypothetical) JB HiFi
Beta Value (0.20) 0.26
Market Return Rate - 7.90
Risk-free rate 1.90 1.90
Premium 6.00 6.00
(1.20) 1.56
Expected Return
Rate 0.70 3.46
Expected return as per CAPM = Riskfree Rate + Beta (Market Return – Risk-Free Rate)
b.
Particulars Weight
Retur
n
Weighted
Return
Company
(Hypothetical) 0.50 0.70 0.35
JB Hifi 0.50 3.46 1.73
Total 2.08
11

Question 3
Risk and return of securities of any security can be determined through any measure. In common
parlance, higher return indicates that the security is performing well. In the given case, where the
return of hypothetical company is 0.7%, the return of JB HiFi is 3.46%. Thus, it can be said that
the return of JB HiFi is 3.46% is higher than that of hypothetical company.
On the other hand, risk in the form of beta has been computed. Accordingly, beta of hypothetical
company is negative i.e., (-0.2) and the beta of JB HiFi is 0.26 indicating the fact that HiFi is
riskier.There are also different measures for computing risk associated with the securities.
12