Asia Pacific College Finance Report: Stock and Bond Analysis

This finance report delves into various aspects of financial analysis and valuation. It begins with a mini-case exploring expected return, standard deviation, and reward-to-risk ratios. The report then calculates the expected return using the Capital Asset Pricing Model (CAPM). Furthermore, it analyzes stock valuation, determining stock prices and their worth over time. The report also covers bond valuation, including calculations for bond value and effective annual yield. Key capital budgeting methods like NPV, IRR, and payback period are discussed, along with an explanation of the Weighted Average Cost of Capital (WACC) and its significance. Finally, the report differentiates between stocks and bonds, examining their risk profiles and the relationship between bonds and interest rates, supported by relevant references and bibliography.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Mini Case:........................................................................................................................................2
1. Expected return of return and standard deviation:.......................................................................2
2. Indicating the reward to risk ratio for the fund based on the fund’s standard deviation:............2
3. Calculating the expected return for the fund based on Capital Asset Pricing Model:.................2
Question:..........................................................................................................................................3
A. Calculating stock price and detecting its worth in 5 years:........................................................3
B. Calculating the bonds value and effective annual yield on the bond:.........................................3
C. Discussing the NPV, IRR and Payback period methods:...........................................................4
D. Discussing about the WACC in details and stating about its usefulness:...................................4
E. Discussing the difference between stock and bond, while discussing the relationship between
bond and interest rates:....................................................................................................................5
References and Bibliography:..........................................................................................................6

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Mini Case:
1. Expected return of return and standard deviation:
Probability (P) Return (R) PxR
0.1 50% 5.00%
0.5 35% 17.50%
0.35 5% 1.75%
0.05 -100% -5.00%
Expected return (Er)
19.25
%
Probability (P) Return (R) PxR R-Er Px(R-Er)^2
0.1 50% 5.00% 30.7500% 0.95%
0.5 35% 17.50% 15.7500% 1.24%
0.35 5% 1.75% -14.2500% 0.71%
0.05 -100% -5.00% -119.2500% 7.11%
Variance 10.01%
Standard deviation (SD) 31.63%
2. Indicating the reward to risk ratio for the fund based on the fund’s standard deviation:
Particulars Value
Expected return (Er) 19.25%
Standard deviation (SD) 31.63%
Interest rate (i) 4.50%
Risk reward ratio
(Er-i)/SD 0.47
3. Calculating the expected return for the fund based on Capital Asset Pricing Model:
Particulars Value

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Rf (A) 4.50%
Market premium (B) 5.50%
beta (C) 3.55
CAPM (A+CxB) 24.03%
Question:
A. Calculating stock price and detecting its worth in 5 years:
Particulars Value
Dividend (A) $ 2.00
ke (B) 16.00%
Growth rate (C) 8.00%
Current value of stock [(A*(1+C))/(B-C)] $ 27.00
Particulars Value
Dividend $ 2.00
ke 16.00%
Growth rate 8.00%
P $ 27.00
Pv of the dividends $ 6.71
Stock price in 5 years $ 24.20
B. Calculating the bonds value and effective annual yield on the bond:
Particulars Value
Coupon rate 10%
Coupon payment 100
Face value $ 1,000.00
Time 20
YTM 12%
Bond value $ 850.61
Effective annual
yield 12.709%

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C. Discussing the NPV, IRR and Payback period methods:
NPV method is considered to be the best and viable investment appraisal techniques,
which allow the companies to determine the present value of the future cash flows generated
from a project. IRR is only viable to detect whether the projects returns is higher than the
discounting rate, while payback period only provide information about the total time that will be
taken to return the initial capital. Both IRR and payback period does not provide information
about the present value of future cash flows that would be generated from a project (Lefley,
2018).
Year Cash flow
0 -15,000.00
1 5,000.00
2 5,000.00
3 5,000.00
4 5,000.00
Discounting
rate 10%
NPV 849.33
D. Discussing about the WACC in details and stating about its usefulness:
The weighted average cost of capital (WACC) allows the investors to detect the
investments, which are higher than the value, as it would allow them to generate higher returns in
the long run. This estimation also allows the investors to understand the minimum returns that
need to be provided by the organisation for maintaining the current share price trend (Mari &
Marra, 2018).

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E. Discussing the difference between stock and bond, while discussing the relationship
between bond and interest rates:
The major difference between stock and bonds is the risk level, where bond is considered
to be a risk-free asset, while shares have high risk associated with the investment. The major
features of a bond are depicted as follows.
 Par value is a major feature of a bond, which is paid at the time of maturity.
 Coupon interest rate is the second feature of a bond, which provides constants returns to the
investors
 Maturity date and issue date are also considered a feature where the relevant time period of
the bond is detected.
 Lastly, the yield to maturity is the total returns that are being provided by the bond to the
investors.
Figure 1: Relationship between bond and interest rate
(Source: Keynes, 2018)

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References and Bibliography:
Bader, A., Al-Nawaiseh, H. N., & Nawaiseh, M. E. (2018). Capital Investment Appraisal
Practices of Jordan Industrial Companies: A Survey of Current Usage. International
Research Journal of Applied Finance, 9(4), 146-161.
Keynes, J. M. (2018). The General Theory of the Rate of Interest. In The General Theory of
Employment, Interest, and Money (pp. 145-153). Palgrave Macmillan, Cham.
Lefley, F. (2018). Dispelling the Myth Around the Financial Appraisal of Capital Projects. IEEE
Engineering Management Review, 46(1), 47-51.
Mari, C., & Marra, M. (2018). Valuing Firms Under Default Risk and Bankruptcy Costs: A
WACC-Based Approach. International Journal of Business, 23(2), 111-130.
Schwarzbichler, M., Steiner, C., & Turnheim, D. (2018). WACCs and Hurdle Rate. In Financial
Steering (pp. 21-37). Springer, Cham.