Course Title: Introduction To Finance

Course Code: FIN201

Section: 3

Submitted To: Tahmina Ahmed

Date of Submission: 14/12/23

Submitted By:
Name ID

Letter of Transmittal
Date:14/12/23

To,

Tahmina Ahmed

Lecturer, FIN 201

Independent University, Bangladesh,

Bashundhara R/A, Dhaka 1212,

Subject: Report on Comprehensive Final Case.

Dear Miss,

It's an absolute honor for us to present our report but if you need any assistance in interpreting
this report, please contact us without any kind of hesitation. The report has been completed by the
knowledge that we have gathered from the course "Introduction to Finance".

Thank you for giving us this opportunity to write a report. We hope that you like our report and
please pardon us for any mistake made in this report.

Sincerely Yours,

Group-03

Section-03

Independent University, Bangladesh (IUB)

2

Acknowledgement

First of all, we would like to express our deepest gratitude towards our respective faculty, our
mentor and our guidance Tahmina Ahmed. Without her, we wouldn't be able to have this
opportunity to do this report as he gave us all the necessary details required to complete this
report.

Secondly, we would like to express our gratitude towards each and every member of our group as
they showed consistency in providing all the necessary information that they provided us with
their skills and findings. Without all of the group members, this report wouldn't be possible to
make as this is an important report for us.
3

Table Of Contents
Contents Page No.

Letter of transmittal 1

Acknowledgement 2

Calculate specific cost of each source of

financing4-6
Calculate WACC 6

the payback period, Net present value,

6-10
Internal rate of the return,profitability
index

Which one is the best route if they are

10-11
independent or mutually exclusive
projects
 Suppose the DHK-CTG route is risky
due to the possible entry of new
11-12
competitors in the future. Accordingly,
the risk-adjusted discount rate for this
route will be 5% plus existing rate. How
will this affect your decision? Support
your decision by calculation

Appendix 13

1.Calculate specific cost of each source of financing(Round the answer to the nearest
two decimal points percent,like 11.12%)

Cost of Capital:
The cost of capital represents the normal value of future financing to the firm which if the value
of money is 15%, the company has to earn at least 15% investments to attain break even.

Given Value:
Principal Payment BDT 1,000.00

Coupon Rate 15%

Annual Interest Payment [15%*1000]=BDT 150.00

Number of Years to Maturity 12 years

Bond Price BDT 1300.00

Tax Rate 45%

Cost of Dept:
The cost of Debt is measured by the interest rate, or yield,paid to bondholders. Cost of debt. Is
the interest rate that is set by the bank but we need to know this rate after the tax is paid.

We Know, Cost of Debt,(Kd)=YTM(1-Tax Rate)

������������ ���������������� ��������������
+������ ����������−������������ ����������
 ����. ���� ���������� ����
Here,YTM= ����������������
������
����������+������������
����������
2

=150+(1000−1300)
12
1000+1300
2

Therefore, Kd=������(1 − =125

������ 1150
��������) =0. =0. 1087 ���� 10. 87%
1087(1 − 0. 45)
=0. 0598 ���� 5. 98%
5

Cost of Preferred Stock:

The cost of preferred stock is similar to the cost of debt. in that a constant annual payment is
made, but dissimilar in that there is no maturity date on which a principal payment must be
made. Determining the yield on preferred stock is simpler than determining the yield on debt.
Given Value:
Preferred Stock Dividend,Dp BDT [90*10%]=9.00

Price of Preferred Stock,Pp BDT 90.00

Floatation cost of Preferred stock,F BDT 3.2

����
We Know, Cost of Preferred Stock,Kp=
����−��
9
=
90−3.2
=0. 1037 ���� 10. 37%

Cost of Common Stock:

The cost of common stock is the required rate of return of the common stockholders.
Given Value:
Common Stock Dividend,D1 BDT 8.00

Price of Common Stock,Po BDT 180.00

Flotation Cost of Common Stock,F BDT 5.00

 Dividend Growth Rate,g 10% or 0.1

��1
We Know, Cost of Common Equity,Ke=
����−�� + ��

=8
180−5 + 0. 1

=0. 1457 ���� 14. 57%

6

2. Calculate WACC (The firm’s optimum capital structure shows 35% Long-term
debt, 20% Preferred stock, and 45% Common stock equity).

WACC:
Weighted average cost of capital (WACC) represents a company's cost of capital, with each
category of capital (debt and equity) proportionately weighted.
Given that,
Long-term Debt.,Wd 35% Or 0.35

Preferred Stock,Wp 20% Or 0.2

Common Stock Equity,We 45% Or 0.45

We Know,
WACC=(���� * ����) + (���� * ����) + (���� * ����)
=(0. 35 * 0. 0598) + (0. 45 * 0. 1457) + (0. 2 * 0. 1037)
=0. 02093 + 0. 065565 + 0. 02074
=0. 1072 ���� 10. 72%

3.Determine the payback period, Net present value, Internal rate of the return,profitability
index for both of the routes:

Payback Period:

Here,53,00,000 and 42,00,000 investments and the cash following cash flows for two
alternatives.
Payback for DHK-CTG:

53,00,000 – 2231405 1 year

3068595 – 2231322 2 year

837273 / 2231491 0.38 years

Total years = 2.38

Payback for DHK-RAJ:

42,00,000 – 2231405 1 year

7

1968595 / 2231322 0.88 years

Total years = 1.88

● Payback investment DHK-CTG = 2.38 years

● Payback investment DHK-RAJ = 1.88 years

Investment DHK-RAJ would be selected because of the faster payback.

Net present value:

Net present value for DHK-CTG:

������2 �����4
������1 �
(1+��)3+
������3 ����5
��
(1+��)4+
NPV= + + - initial investment
(1+��)1 (1+��)2 (!+��)5

2231322
(1+10.72%)1+
2231405 2221611
2231491 (1+10.72%)4+
(1+10.72%)2+
2210790
(1+10.72%)3+
= -5300000 (1+10.72%)5

=2985854.536

Net present value of DHK-RAJ:

������2 �
(1+��)3+
������1
 �����4

������3 ����5
��
(1+��)4+
NPV= + + - initial investment
(1+��)1 (1+��)2 (!+��)5

2231322
(1+10.72%)1+
2231405 2221611
2231491 (1+10.72%)4+
(1+10.72%)2+
2210790
(1+10.72%)3+
= -4200000 (1+10.72%)5

=4085854.536

Internal Rate Of Return(IRR):

IRR is a financial indicator that assesses how profitable a project or investment is. it is the
interest rate at which all future cash inflows and outflows have a net present value of zero.

DHK-CTG:

Assuming that, Discount rate, K=50% or 0.50

����2 ����3 ����4 ����5
����1
NPVHDR=[ + + + + ] - Io
(1+��)1 (1+��)2 (1+��)3 (1+��)4 (1+��)5

=[ + + + + ]-53,00,000 2231405
(1+0.50)1 (1+0.50)2 (1+0.50)3 (1+0.50)4 (1+0.50)5
2231322 2231491 2210790 2221611
8

=( 1487603.33+991698.67+661182.52+436699.26+292557.83) -53,00,000

= 3869741.61-53,00,000

= -1430258.39

We know that, Discount rate, K= 30% or 0.30

����2 ����3 ����4 ����5
����1
NPVLDR=[ + + + + ] - Io
(1+��)1 (1+��)2 (1+��)3 (1+��)4 (1+��)5
=[ + + + + -53,00,000 2231405
(1+0.30)1 (1+0.30)2 (1+0.30)3 (1+0.30)4 5
2231322 2231491 2210790 2221611
(1+0.30) ]

=( 1716465.39+1320308.88+1015699.14+774059.03+598344.44) -53,00,000

= 5424876.88-53,00,000

= 124876.88

Internal Rate of Return or IRR=

(������−���
LDR+
���)������ ����

������
������
����
������−������
���� ������

(50%−30%)×124876.88
=30%+
124876.88−(−1430258.39)

= 31%

DHK-RAJ:

Assuming that, Discount rate, K=60% or 0.60

����2 ����3 ����4 ����5
����1
NPVHDR=[ + + + + ] - Io
(1+��)1 (1+��)2 (1+��)3 (1+��)4 (1+��)5

=[ + + + + ]-42,00,000 2231405
(1+0.60)1 (1+0.60)2 (1+0.60)3 (1+0.60)4 (1+0.60)5
2231322 2231491 2210790 2221611

=(1394628.13+871610.16+544797.61+337339.78+211869.34)- 42,00,000

=3360245.02-42,00,000

= -839754.98
9
We know that, Discount rate, K= 40% or 0.40
����2 ����3 ����4 ����5
����1
NPVLDR=[ + + + + ] - Io
(1+��)1 (1+��)2 (1+��)3 (1+��)4 (1+��)5

=[ + + + + -42,00,000 2231405
(1+0.40)1 (1+0.40)2 (1+0.40)3 (1+0.40)4 5
2231322 2231491 2210790 2221611
(1+0.40) ]

= ( 1593860.72+1138429.59+813225.58+575486.78+413073.98) -42,00,000

= 4534076.65-42,00,000

= 334076.65

Internal Rate of Return or IRR=

(������−���
LDR+
���)������ ����

������
������
����
������−������
���� ������

(60%−40%)×334076.65
=40%+
334076.65−(−839754.98)

= 45%

Profitability Index:

The attractiveness of an investment or project is measured by the profitability index (PI).

DHK-CTG:

We know that, Profitability Index= PV of future cash flows ÷ Initial investment

����2 ����3 ����4 ����5
����1
=[ + + + + ] Io
(1+��)1 (1+��)4 5
(1+��) 2
(1+��) 3 (1+��)
 ÷
2231322 2210790
2231405 2231491 2221611
=[ + + + + ]
(1+0.1072)1 5
(1+0.1072)2 (1+0.1072)3 (1+0.1072)4 (1+0.1072) ÷
53,00,000

=( 2015358.56+1820162.21+1644057.14+1471103.35+1335173.28)÷ 53,00,000

= 8285854.54÷53,00,000

= 1.56 times
10

DHK-RAJ:
2231322 2210790
2231405 2231491 2221611
=[ + + + + ]
(1+0.1072)1 5
(1+0.1072)2 (1+0.1072)3 (1+0.1072)4 (1+0.1072) ÷
42,00,000

=( 2015358.56+1820162.21+1644057.14+1471103.35+1335173.28)÷ 42,00,000

= 8285854.54÷42,00,000

= 1.97 times

As we know that if PI is greater than 1.0 it is a good investment. So as the DHK-RAJ PI has the
highest value than DHK-CTG so we will choose DHK-RAJ.

4. Which one is the best route if they are independent or mutually exclusive projects:

Independent project: Projects are considered independent when the choice to accept or reject
one does not impact the other. The identical accept/reject judgment will be made based on NPV
and IRR if two independent projects have conventional cash flows. As both projects have positive
NPV so both routes are independent projects.

Mutually exclusive project: If selecting one project requires you to reject another, these projects
are mutually exclusive. For that it is necessary to compare two projects:
Name DHK-CTG DHK-RAJ
 PBP 2.38 years 1.88 years

NPV 2985854.54 BDT 4085854.54 BDT

IRR 31% 45%

PI 1.56 times 1.97 times

● As for the PBP we can see that DHK-RAJ (1.88) has the shorter value than
DHK-CTG(2.38), so DHK-RAJ has the quickest recovery of initial investment Than
DHK-CTG.
● For the NPV, DHK-RAJ has a higher value than DHK-CTG. So a higher value of NPV will
be more acceptable for the company.
11

● For the IRR, DHK-CTG has the lowest value than DHK-RAJ and for the PI, DHK-RAJ
has the highest value.

In this case we can see that DHK-RAJ has shorter PBP, higher NPV, IRR And PI compared to
DHK-CTG. So for mutually exclusive projects we will choose DHK-RAJ.

5. Suppose the DHK-CTG route is risky due to the possible entry of new competitors
in the future. Accordingly, the risk-adjusted discount rate for this route will be 5%
plus existing rate. How will this affect your decision? Support your decision by
calculation:

Existing WACC value was 10.72% and the given one was 5%.

So, Discount rate, K=(10.72%+5%)= 15.72%/0.1572

NPV������ =[ + + + + ]- 5300000 2231405

(1+0.1572)1 7338030.76-53 =2038030.76 (1+0.1572)2 (1+0.1572)5
2231491
= 00000 Let assume,
(1+0.1572)3
2210790
K=50%/0.50 (1+0.1572)4
2231322 2221611
NPV������ = [ + + + + ]-5300000 2231405
(1+0.50)1 (1+0.50)2 (1+0.50)3 (1+0.50)4 (1+0.50)5
2231322 2231491 2210790 2221611

=3869741.61-53,00,000

= -1430258.39

IRR = 15.72% +(50%−15.72%)×2038030.76

2038030.76−(−1430258.39)

=36%

PI =7338030.76
5300000

= 1.38 times

There’s no changes in our decision. Because we can see that NPV has increased but PBP, PI and
IRR is still lower than DHK-RAJ. So our decision will be the same.
12

● How the discount rate is affecting the decision?What happens when discount rate has
increased or decreased?

=> Discount rate always plays a vital role in capital budgeting tools. If discount rate increases, it
may decrease IRR,decrease NPV and decrease PI. On the other hand, if the rate decreases, IRR
may increase,NPV may increase and PI will increase.To sum up, adjustments to the discount rate
have a big influence on how investment projects will be evaluated. When employing these capital
budgeting tools, investors and decision-makers must take the cost of capital and the opportunity
cost of financial resources into consideration.
13

Appendix

(������−������)×������ ���� ������

IRR= LDR+
 ������ ���� ������−������ ���� ������

Result: DHK-RAJ: 45%

DHK-CTG: 31%

Profitability Index= PV of future cash flows ÷ Initial investment

Results: DHK-RAJ: 1.97 times

DHK-CTG: 1.56 times

NPV= + + - initial investment ������1

������2 ����4
��
(1+��)3+
(1+��)1 ��5
(1+��)2 (!+��)5
������3 ����
(1+��)4+

Results: DHK-RAJ: 4085854.54 BDT

DHK-CTG: 2985854.54 BDT

● Payback investment DHK-CTG = 2.38 years

● Payback investment DHK-RAJ = 1.88 years

The aviation sector in Bangladesh is relatively young, particularly when it comes to domestic
flights, as there are not many people traveling by air between different districts. Currently,
Bangladesh has five main airlines operating: Biman, NovoAir, Regent, Air Astra, and US Bangla.
WingSpan Airlines, a new company, is looking into the potential of launching domestic flights,
either for the DHK-CTG route or the DHK-RAJ route. We choose DHK-RAJ because it has
higher NPV, IRR and PI and lower PBP than DHK-CTG. So it will be more profitable than
DHK-CTG.

So,by the following calculation we can suggest that DHK-RAJ is the best route.