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Answer 1A

The five basic principles of finance are:

1. Time value of money: the cash worth today is more than the cash got later on. This is
because of swelling in the economy. Along these lines, a financial backer ought to
consistently remember the loan fee and expansion prior to putting away cash.

2. The standard of danger and return: the higher the danger, the higher the arrival of a
venture.

3. Enhancement; when we differentiate our ventures by placing our cash into various
crates, at that point we can diminish our hazard and amplify the get back from the
speculations we make.

4. Productivity and liquidity: the financial backers consistently investigate two ideas prior
to contributing. They perceive how well and beneficial a speculation is just as how fluid
and attractive a venture is.

5. Income: this is the inflow and outpouring of assets. The cash that streams early is
more important than the cash that comes later, this is additionally knows as the time
estimation of cash.

Answer 1B

 Net Profit Margin = 0.35

 Sales = $5,000,000

Total Assets = $4,500,000

 Debt ratio = 0.45

i) What was New Age IT Solutions’ return on equity (ROE) in 2020?

Return On Equity = ROE = Net Income / Equity Capital

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  Net Income = 0.35 x $5000000 = $1750000

Equity Capital:

Debt ratio = Debt / Total Assets or Total Capital

 0.45 = Debt / 4500000

 Debt = 4500000 x 0.45 = $2025000

Equity Capital = Total Assets – Debt

 Equity = 4500000 - 2025000 = $2475000

 ROE = Net Income / Equity Capital = 1750000 / 2475000

Return on equity = 70.71% Approx.

ii) What was return on assets (ROA) of the company in 2020?

Return On Assets = ROA = Net Income / Total Assets

 ROA = 1750000 / 4500000

ROA = 38.89% Approx.

iii) Earnings Per Share (EPS) and price earnings ratio (PE) of the company

Earning Per Share = EPS = Net Income / No. of shares

 EPS = 1750000 / 50000

EPS = $35

 P/E ratio = Price per share / Earning per share

 P/E = 85 / 35

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 P/E ratio = 2.43 approx.

Answer 2

a) Formula

A= P (1 + r) ^n

A= Future return

P= Today’s investment

N= no of years

R= interest rate

$15000 = $5000 (1+0.076) ^n

15000/5000 = (1+0.076) ^n

3 = (1.076) ^n

Log 3 = n log (1.076)

N = log (3)/ log (1.076)

N = 14.99 or 15 years to the nearest decimal

B)

P = A/ (1+r)

P = 150000/ (1.076) ^10

P = $ 72105.52

C)

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A = P (1+r) ^n

500000 = 150000 (1+r) ^12

500000/150000 = (1+r) ^12

3.33 ^ 0.083 = 1+r

R =1-1.1055

R = 0.1055

R = 10.55%

D)

ANZ Bank = EAR = (1+0.0485) ^2 /2 – 1

EAR = 0.0491 or 4.91%

Commonwealth Bank = EAR = (1+0.0483) ^1 -1

EAR = 0.0483 or 4.83%

NOTE:

As ANZ bank has EAR value of 0.0483 or 4.83% so Lisa should choose ANZ bank.

Answer 3

Arithmetic average return

 Arithmetic Average return = 14%+(-13%) +15.60%+17%+ 19.50%= 53.1 / 5

= 10.62% or 11%

Geometric Average return= 9.89% or 9.9 %

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 14%
-13%
15.60%
17%
19.50%

  Arithmetic average return 11%

b) 

Expected return = .25*-2.5% + .45*13.5% + .30*20% = 11.45% 

Variance =. .25*(-.025-.1145) ^2 + .45*(.135-.1145) ^2 + .30*(.20-.1145) ^2 = .00725

Standard deviations = √.00725 = 8.51%

c)  Expected return = Risk free + beta*(Market rate of return- Risk free rate)

13.2% = 3.5% + 1.2*(RM - 3.5%)

13.2% - 3.5% = 1.2RM - 4.2%

9.7% = 1.2RM - 4.2%

13.9% = 1.2 RM

Rm = 13.9/1.2 = 11.58%

Market portfolio Return = 11.58%

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Answer 4A

A) Current Price of the Corporate Bond 

Price of bond:

Input the following in financial calculator:

FV = face value = 1000

PMT = annual coupon = $1000x10.5% = 105

I/Y = yield to maturity = 9.7%

N = time to maturity = 16

"CPT", "PV", we get -

PV = Current bond price = $1,063.72

Current price of bond = $1,063.72

Current price of ordinary share:

= D0x(1+g) / (r - g)

D0 = dividend just paid in year 0

g = constant growth rate in dividends

r = required rate of return

= $6.50 x 1.045 / (0.115 - 0.045)

= $6.7925 / 0.07

= $97.04

Current price of ordinary share = $97.04

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 c)

Current value of preferred share:

= Annual dividend / Required return

= [Face value x dividend rate] / Required return

= [$100 x 15%] / 0.125

= $15 / 0.125

= $120

Current value of preferred share = $120.00

Answer 4B

Bonds/ Market price Current Formula Market Capital Formula Cost WACC
Share market value Value Struct Capital
Numbers ure Structure

Ordinary 68000 35 2380000 =68000*35 52.63 =238000/452194 7.92% 4.17%

Equity

15000 75 1125000 15000*75 24.88 =1125000/4521940 10.67% 2.65%

Preference
equity
850 1196.4 1016940 850*1196. 22.49 =1016940/4521940 5.20% 1.17%
Debt 4
Total 4521940 WACC 8.0%

Current market value

Of equity = 2380000

Of preferred = 1125000

Of debt = 1016940

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Total = 4521940

b)

Capital structure

Equity = 52.63%

Preferred Equity = 24.88%

Debt = 22.49%

Total weights of equity funding (Ordinary + preferred) = 52.63% + 24.88%

= 77.51%

c)

WACC = 8%

Formulas and calculations:

Answer 5

NPV Project Gold

Year Cash flow Factor @9% Present value
0 -485000 1 -485000
1 105850 0.917 97110.09
2 225650 0.842 189925.09
3 250350 0.772 193316.13
4 162400 0.708 115048.25
5 255000 0.650 165732.50
NPV 276132.06

NPV Project Diamond

Year Cash flow Factor @9% Present value
0 -520000 1 -52000
1 153250 0.917 140596.33
2 245000 0.842 206211.60
3 117050 0.772 90384.08

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4 275500 0.708 195171.15
5 260000 0.650 168982.16
NPV 281345.31

NPV of the Project Gold is amounting to $276,132.07

NPV of the Project Diamond is amounting to $281,345.31

 Net Present value is the difference between present value of cash inflows and
present value of cash outflows. Project is accepted whose NPV is greater than
zero. Hence, Project Diamond is accepted as its NPV is higher than Project Gold.

i) To Calculate Discounted Payback Period of Project Gold:

Discounted
Payback Period
         
Year Cash Required Rate Discounted Cumulative
Flows @ 12% Cash Flows Discounted Cash
Flows
         
0 -485000 1 -485000  
1 105850 0.917 97110.09 97110.09
2 225650 0.842 189925.09 287035.18
3 250350 0.772 193316.13 480351.32
4 162400 0.708 115048.25 595399.57
5 255000 0.650 165732.50 761132.07

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 Discounted Payback Period = 3 + 485000 – 480351.32 /115048.25

Discounted Payback Period = 3.04 years

ii) Discounted Payback Period of Project Diamond

Discounted
Payback Period
         
Year Cash Required Rate Discounted Cumulative
Flows @ 12% Cash Flows Discounted Cash
Flows
         
0 -520000 1 -520000  
1 153250 0.917 140596.33 140596.33
2 245000 0.842 206211.60 346807.93
3 117050 0.772 90384.08 437192.00
4 275500 0.708 195171.15 632363.15
5 260000 0.650 168982.16 801345.31

Discounted Payback Period = 3 + 520000 – 437192 / 195171.15

Discounted Payback Period = 3.41 years

Both the Project are non-accepted as its payback period is higher than companies’
payback period.

Answer 6

a)

Amount they can pay as dividend = Net Profit - Investment = 3,546,000 - 1,045,000

 Dividend = $2,501,000

Dividend payout ratio = Dividend / Net Profit = 2,501,000 / 3,546,000 = 70.53%

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b. 

Total dividend = 5.5 + 2.5 = $8

After tax dividend = 8 x (1 - 0.15) = $6.8

Ex-dividend price = Share Price - after tax dividend = 72 - 6.8 = $65.2

c.

PV of dividends = 8.5 + 12.5 / 1.12 = $19.66 million

Value of firm's equity = $19.66 million

Value per share = Value of equity / Number of shares = 19.66 / 1.5 = $13.12

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