Faculty of Higher Education

Assignment Cover Sheet

Unit Code HI5002

Unit Name FINANCE FOR BUSINESS

Assignment TUTORIAL QUESTION ASSIGNMENT 1

Due Date 22 - 05- 2020

Declaration

We certify that:
1. This assignment is our own work. We have acknowledged and disclosed any
assistance received in its preparation and cited all sources from which data, ideas,
words (whether quoted directly or paraphrased) were taken.

2. This assignment was prepared specifically for this unit only.

3. The reference list is truthful and accurate and in Harvard referencing style.

STUDENT NAME AND ID CAMPUS INTERACTIVE AND LECTURER NUMBER OF QUES

TUTORIAL GROUP NUMBER
JATINDER SINGH PUONG DOUNG 1, 2, 3, 4, 5

(Dy80290)
 Table of Contents

Answer to Question (Week 1)....................................................................................................2

Answer to Question (Week 2)....................................................................................................4

Part A.....................................................................................................................................4

Part B......................................................................................................................................5

Answer to Question (Week 3)....................................................................................................6

Part A.....................................................................................................................................6

Part B......................................................................................................................................7

Part C......................................................................................................................................7

Answer to Question (Week 4)....................................................................................................8

Part A.....................................................................................................................................8

Part B......................................................................................................................................9

Answer to Question (Week 5)..................................................................................................10

Part (A).................................................................................................................................11

Part B....................................................................................................................................12

PART C…………………………………………………………………………………………......12
PART D……………………………………………………………………………………………..13

Reference..................................................................................................................................13

ANS TO QUES 1 :
PRINCIPALS OF FINANCE :
FINANCE is the way toward gathering assets to contribute to guarantees legitimate
usage. Appropriate financing required to follow 6 center standards of fund to guarantee
the expansion of advantage. Quickly, money is the administration of assets. The
individual who is liable for dealing with the reserve is notable as money related
directors. Standards go about as a rule for the venture and financing choice. Monetary
administrators take working, venture and financing choices, a portion of this identified
with the present moment and some long haul. The 5 Principles of Finance everybody
should Know whether it is for people or associations.
1. CASH FLOW IS WHAT MATTER
2. TIME HAS A TIME VALUE
3. RISK REQUIRES AN AWARD .
4. DIVERSIFICATION
5. HEDGING

1 . CASH FLOW IS WHAT MATTERS :

The income guideline for the most part talks about the money inflow and outpouring,
more money inflow in the prior period is ideal than later income by the speculators.
This standard additionally follows the time esteem rule that is the reason it lean
towards prior a larger number of advantages instead of later years benefits.Accounting
profits are not equal to cash flows . It is possible for a firm to generate accounting
profits but not have a cash or to generate cash flows but not report accounting profits
in the books . It is the cash flow which drives the value of business . Incremental cash
flow is defined as difference of projected cash flow versus what they will be , if the
project is not selected .

2 . TIME VALUE OF MONEY :

The following principle is concerned with the value of with time interval that
estimation of cash is diminished when time passes. The estimation of dollar 1 of the
here and now is more than the estimation of dollar 1 after some time or years. So before
contributing or taking assets, we need to consider the expansion pace of the economy
and the necessary pace of return must be more than the swelling rate so return can
make up for the misfortune brought about by the swelling the value of investment with
time .

3 . RISK REQUIRES AN AWARD :

The higher the prize, the more noteworthy the hazard. This standard recommends that
making a high-chance speculation is a misuse of assets if the arrival is little. For
instance, if CHRIS has the decision to put resources into a completely upheld
government bond or a garbage bond that isn't made sure about, the hazard will be low
for the administration bond and high for the unbound bond. A garbage security is a
security that isn't appraised profoundly, which implies that there is a high possibility that
there will be a default on the venture. In the event that CHRIS puts resources into the
garbage bond, he may not be paid. Then again, the administration ensures that the
holder of an administration security will recover their cash. Made sure about bonds are
additionally viewed as okay since they are supported by an advantage, for example, a
vehicle or house, that a moneylender can guarantee responsibility for the borrower
default on the credit. This is significant, since it lessens the danger of the financial
specialist losing their benefits.

4 . DIVERSFICATION :

This rule assists with limiting the risk by building an ideal portfolio. The possibility of a
portfolio is, never placed every one of your eggs in a similar container in such a case
that it falls then the entirety of your eggs will break, so put eggs by isolating in an
alternate bushel with the goal that your hazard can be limited. To guarantee this rule
financial specialists need to put resources into chance free speculation and some
unsafe venture so that at last hazard can be lower. Expansion of venture guarantees
minimization of risk .

5 HEDGING :
Hedging principles indicates shows us that we need to take a credit from suitable
sources, for momentary reserve prerequisite we need to back from transient sources
and for long haul fun necessity we need to oversee finance from long haul sources. For
fixed resource financing is to be done from long haul sources. At long last, in the event
that you have an essential comprehension of money and its standards, at that point you
will have the option to take monetary choices viably. What's more, there is a higher
chance to turn out to be monetarily gainer.

ANS TO QUES NO 2 :

Little book ltd total assest value = $860,000

Outstanding shares = 75,000
Total book value = $ 750,000 with market value $ 12 a share .
Profit margin = 6.5 %

Total assesr turnover = 1.5

To calculate earning per share , we will use following formula :

= NET INCOME / WEIGHTED AVERAGE OUTSTANDING SHARES

NOW to find net income we will take help of assest turnover ratio :

= NET SALES / TOTAL ASSEST

LET X BE THE NET SALES DURING THE YEAR .

ASSEST TURNOVER RATIO = X / 860000

1.5 * $ 860000 = X * ( NET SALES ) = $ 1290000

OUTSTANDING SHARES = 75000 SHARES

SO NET INCOME = $ 1290000 * 0.065

= $ 83, 850

HENCE , EARNING PER SHARE = $83,850 / 75000

EPS = 1.118

PART B :

MARKET TO BOOK RATIO =

MARKET CAPTALIZATION / TOTAL BOOK VALUE

MARKET CAPITALIZATION = $ 75000 * $ 12

= $ 900,000

SO , MARKET TO BOOK RATIO = 900000 / 75000

= 1.2

MARKET TO BOOK RATIO = 1.2 FOR LITTLE BOOK LTD .

ANS TO QUES 3

An effective annual rate is the modified interest rate from the nominal rate that
represents the equivalent rate if annual compound interests are computed .

AMOUNT DEPOSITED IS $12,500 ( 15 YEARS AGO )

INTEREST RATE 8% FOR FIRST 10 YEARS

INTEREST RATE FOR NEXT FIVE YEARS IS 6.5 %

NUMBER OF YEARS ARE 15

INTEREST RATE FOR NEXT FIVE YEARS IS 6.5%

NUMBER OF YEARS ARE 15

ADDITIONAL AMOUNT OF $20,000 IS DEPOSITED 5 YEARS AGO

EFFECTIVE ANNUAL RATE = ( 1 + NOMINAL RATE / NUMBER OF COMPUNDING )^

(NUMBER OF COMPUNDING IN A YEAR ) – 1

= ( 1 + 0.08/ 2)^2 – 1

= 1.0816 – 1

= 0.0816

= 8.16%

PART B :

Total money in account

INITIAL AMOUNT = $12,500

SEMI ANNUALLY COMPUND INTEREST = 8 % FOR FIRST 10 YEARS .

USING COMPUND INTEREST FORMULAE ,

= 12500 ( 1 + 4/100) ^ 2* 10

= 12500 ( 26 / 25 ) ^ 20
 = 12500 ( 1.04 ) ^ 20

= 27 , 389

FIVE YEARS AGO AMOUNT ADDED TO COMPUNDED AMOUNT = $20,000

= 47389 ( 1 + 6.5 / 100 ) ^ 5

= 47389 ( 1 + 13 / 200 ) ^ 5

= 47389 ( 1.065) ^5

= 64 ,922.93

= 64, 923

PART C

IF AMOUNT RECEIVED IS $ 85,000

THEN ACTUAL AMOUNT INVESTED 15 YEARS AGO ,BE X

FOR FIRST 10 YEARS WHEN INTEREST IS 8% SEMI ANNUALLY

= X ( 1 + 4/ 100 ) ^ 20

= X ( 26 /25 ) ^ 20

= 2.19X

WHEN $20,000 AMOUNT IS ADDED FIVE YEARS BEFOR ,

THEN
85,000 = (2.19X + 20,000 ) * 1.37

85,000=(3.0 X + 27400 )

X = 57600 / 3

X= 19200

HENCE AMOUNT INVESTED AT BEGINNING SHOULD BE $ 19,200

AND TO QUES 4 :

GAINT EQUIPMENT IS CONSIDERING TWO PROJECTS TO INVEST NEXT YEAR .

CALCULATION OF PRESENT VALUE AT 12% :

PARTICULARS 1 PROJECT A PROJECT B

ANNUAL CASH 2 $ 42,000 $ 48,000

FLOW

INTEREST RATE 3 0.12 0.12

NUMBER OF YEARS 4 8 7

PRESENT VALUE 5 $ 2,33,677.77 $ 2,19,060.31

Following values were obtained using this formulae :

1 PARTICULARS PROJECT A PROJECT B

2 ANNUAL CASH FLOW 42000 48000

3 INYEREST RATE 0.12 0.12

4 NUMBER OF YEARS 8 7

5 PRESENT VALUE =PV (B3,B4 – =PV(C3,C4-C2,0,0)

B2,0,1)
PRESENT A CURRENT VALUE IS HIGHER AS PAYMENT IS BEING MADE AT
BEGINNING OF YEAR . ALSO TAKING OTHER FACTOR TIME , CASH FLOW IN
PROJECT A IS FOR 8 YEARS WHEREAS IN PROJECT B ,IT IS ONLY FOR 7 YEARS
.

HENCE PROJECT A MUST BE SELECTED .

PART B :

COMUTATION OF PRESENT VALUE AT 14%

PARTICULARS PROJECT A PROJECT B

1 ANNUAL CASH FLOW $ 42,000 $48,000

2 INTEREST RATE 14% 14%

3 NUMBER OF YEARS 8 7

4 PRESENT VALUE OF $222,108.80 $234,656.04

PROJECT

THE CURRENT VALUE OF PROJECT B IS MORE AS COMPARED TO PROJECT A

ALSO PROJECT ANNUAL CASH FLOW IS LOW IN PROJECT A AS COMPARED TO
PROJECT A . HENCE PROJECT B SHOULD BE SELECTED HERE .

ANS TO QUES 5 :

PART A :
A PORTFOLIO IS A COLLECTION OF DIFFERENT TYPES OF
INVESTMENT MADE .THE TOTAL INVESTMENT MADE IS DIVERSIFIED AMONG
DIFFERENT STOCKS AS TO DIVERSIFY THE RISK .
COMPUTING THE WEIGHT OF PORTIFOLIOS ASSESTS :

FIRST , CALCULATE THE TOTAL VALUE OF PORTFOLIO :

VALUE OF PORTFOLIO = SUM OF INVESTMENT IN DIFFERENT ASSETS

= $13,500 + $ 7,600 + $ 5,500

= $ 41,300

WEIGHT OF A = INVESTMENT IN A / VALUE OF PRTFOLIO

= $13,500 / $ 41,300

= 0.33

WEIGHT OF B = INVESTMENT IN B / VALUE OF PORTFOLIO

= $ 7,600 / $ 41,300

= 0.18

WEIGHT OF C =INVESTMENT IN C / VALUE OF PORTFOLIO

= $14,7700 / $ 41,300

= 0.36

WEIGHT OF D = INVESTMENT IN D / VALUE OF PORTFOLIO

= $ 5,500 / $ 41,300

= 0.13

PART B ;

COMPUTE THE GEOMETRIC AVERAGE RETURN OF THE PORTFOLIO :

GEOMETRIC AVERAGE RETURN = { (1 +R1) + (1+R2) + (1+R3)………+(1+RN)}^1/N

–1
 = {(1+9.7%)+(1+12.4%)+(1-5.9%)
+(1+17.2%)}^1/4 – 1
= 8.10 %
THEREFORE ,THE GEOMETRIC AVERAGE RETURN IS 8.10 %
{ R1 , R2 , R3 , Rn are the returns of respective years }

PART C :
EXPECTED RETURN ON STOCK A = 13.6%

MARKET RISK PREMIUM = 4.8%

BETAS OF STOCKS = 1.5 AND INFLATION RATE = 2.7%

USING CAPM MODEL FOR CALCULATING RISK FREE RETURN

Ri = Rf + Bi ( Rm – Rf )

( WHERE Ri = expected risk , Rf = risk free rate , Bi= beta of security )

13.6 = Rf + 1.5 ( Rm – Rf )

13.6 = Rf + 11.25 – 1.5Rf

Rf = 2.35 /0.5

Rf = 4.7 %

Therefore risk free interest obtained = 4.7%

REFERENCE :

(110) five basic principles of finance - YouTubewww.youtube.com

(PDF) PRINCIPLES OF FINANCE - Lecture 01 (Introduction to Finance) | JEWEL

KUMAR ROY - Academia.eduwww.academia.ed

(112) Calculate the Present Value for Multiple Cash Flows (Intermediate Accounting I
#3) - YouTubewww.youtube.com