Final Assignments

course: FIN254

sec: 22

Name: Ashraful islam shawon

ID: 1813325630

Date: 04/06/2020

Submitted to: Tanjina Shahjahan (Tsj)

 Short Question

1. Why time value of money is important in your life. What is loan amortization schedule?
Why it will be beneficial in your life?

Ans: Time value of money: The time value of money (TVM) may be a vital plan to monetary
specialists in lightweight of the very fact that a dollar procurable nowadays is the price in more
than a dollar secure anon. The dollar procurable nowadays will be utilized to contribute and
acquire premium or capital will increase. A dollar secure anon is a price, not precisely a dollar
nowadays as a result of growth. If money will win premium, this center guideline of fund holds
that any life of money is the price a lot of the earlier it's gotten. At the foremost basic level, the
time estimation of money shows that considering everything, it's smarter to own money currently
as hostile later.

Loan amortization schedule: An amortization schedule may be a finished table of intermittent

advance installments, indicating the life of head and therefore the life of intrigue that involves
each installment till the advance is paid off toward the end of its term. whereas every occasional
installment may be a similar total from the beginning within the calendar, most of each
installment is what's owed in intrigue; later within the timetable, most of each installment covers
the advance's head. The last line of the schedule shows the borrower’s total interest and principal
payments for the whole loan term.

Seeing amortization is incredibly helpful on the off likelihood that you just have to be compelled
to see however obtaining functions. Purchasers oft choose selections obsessed with a
"reasonable" frequently regular installment, but intrigue prices square measure a superior
methodology to measure the real expense of what you get. Once in a very whereas a lower
frequently regular installment extremely implies, you may pay a lot of in intrigue, within the
event that you just relax the compensation time, for example. as an example, With the data
arranged get into the AN amortization table, it’s simple to judge completely different loan
choices. you'll be able to compare lenders, choose from a 15- or 30-year loan, or decide whether
or not or to not finance AN existing loan. you'll be able to even calculate what quantity you’d
save by paying off debt early–you’ll get to skip all of the remaining interest charges on most
loans.

2. Future value of annuity due is always higher than future of ordinary annuity. Justify by
giving your own example.

Ans: The difference between the future value of an annuity due (AD) and future value of an
ordinary annuity (OA) is based on the timing of the payments. Annuity dues pay starting
immediately, while ordinary annuity as pay at the end of the period.

For example, let's say you are going to get an annuity that pays you $1000 for 3 years. If that
annuity is an annuity due, it will make the following payments:

1. $1000 on 1/25/17

2. $1000 on 1/25/18

3. $1000 on 1/25/19

If that annuity is an ordinary annuity, it will make the following payments:

1. $1000 on 1/25/18
 2. $1000 on 1/25/19

3. $1000 on 1/25/20

As you can see, you'll receive $3000 in total with either option. The only difference is that
with the annuity due your payments will be completed 1 year sooner as they start on the day
of the investment, whereas the ordinary annuity starts 1 year following the day of the
investment. The annuity due is more valuable than the ordinary annuity due to the time value
of money because you can invest that $1000 you get today and get a return on it. So, that’s
why future value of annuity due always higher than ordinary annuity.

3. What are the components of cost of capital? How will you determine the weights of the
sources of the capital? Why we take the existing stockholders required return as cost of
retained earnings.

Ans: Some of the components of cost of capital are: -

1. Cost of Debt Capital 2. Cost of Preference Capital 3. Cost of Equity Capital 4. Cost of
Retained Earnings 5. Weighted Average Cost of Capital 6. Marginal Cost of Capital 7.
The Cost of Preferred Stock 8. Return on Capital

determine the weights of the sources of the capital: - The weighted price of capital
(WACC) is that the minimum come back a corporation should earn on its comes. It is
calculated by weighing the cost of equity and the after-tax cost of debt by their relative
weights in the capital structure. WACC is a very important input in capital budgeting and
business valuation. it's the discount rate accustomed conclude the current price of money
flows within the internet present price technique. it's the essential hurdle rate to that the
interior rate of returns of various comes area unit compared to make your mind up
whether or not the comes area unit possible. it's additionally employed in the free income
 valuation model to discount the free income to firm (FCFF) to seek out a company's
intrinsic price.

For a company which has two sources of finance, namely equity and debt, WACC is calculated
using the following formula:

E D
WACC = ke × + kd × (1 − t) ×
E+D E+D
Where,
ke is the cost of equity,
E is the market value of equity,
kd is the pre-tax cost of debt,
t is the tax rate,
D is the market value of debt, and
E/(E + D) and D/(E + D) are the respective weights of equity and debt in the company's capital
structure.

stockholders required return as cost of retained earnings: Retained earnings have an

area with the shareholders since they are viably proprietors of the organization.
Whenever set back to the organization, the preserved earnings fill in as any interest
within the firm for the shareholders. The expense of these preserved earnings rises to the
arrival shareholders have to be compelled to expect on their venture. it's referred to as
Associate in Nursing open-door price as a result of the

shareholders penance an opportunity to place away that money for Associate in arrival
elsewhere and instead allow the firm to contrive capital.
 4. When YTM>coupon rate the buyer will buy the bond at a discounted price. Justify this by
giving your own example.

Ans: If yield is higher than the coupon rate then the bond is trading at a discount.

Let's say you own a bond that you paid $2,000 for and it has a coupon rate of 10%. That means
that this Bond will pay $200 per year in interest no matter what its price on the market.
Therefore, your yield is also 10%. Now let's say that there is exactly one year left on this Bond.
That is, this Bond will mature in exactly one year. If you decide to sell me this bond for $1980,
my yield to the maturity date will be 11%. That is, I will receive $220 interest plus an additional
$20 on maturity date. my total payout over the course of a year will be $220 (or, roughly, 22%).

Yield up = price down

Yield down = price up

5. What is Risk? What is Return? There are three types of investors -risk seekers, risk
indifferent and risk averse. Under which category you fall? explain with example

Ans: Risk: Risk is a term in accounting and finance used to describe the uncertainty that a future
event with a favorable outcome will occur. In other words, risk is the probability that an
investment will not perform as expected and the investor will lose the money invested in the
project. All business decisions and opportunities are based on this concept that future
performance and returns are uncertain and rely on many uncontrollable variables.

Return: Return, also called return on investment, is the amount of money you receive from an
investment. You can think of it this way. For every dollar you put into an investment, the
investments earn 10 dollars. This money that the investment earns is considered your return.

Explanation about investors: There are types of investors risk seekers, risk indifferent and risk
averse. I am a risk seeker. Risk-seeking or risk-loving describes a person who cannot get enough
risk. He or she prefers an investment with an uncertain outcome rather than one with the same
expected returns and certainty that they will be delivered. I might naturally find myself drawn to
situations where I could win or lose. The idea of making it big appeals tome, even though I might
also lose big. I could naturally lean toward Option 2, and the chance of winning $100. This is of
course especially true of the guaranteed payment is low, but even if the guaranteed payment is
$50, I could probably still go with the coin toss. Only if the guaranteed amount is greater than
$50, I consider to accepting it.

Short math

1. Herber Company has issued 14% $1,000 par value bonds with quarterly compounding
and 12 years remaining to its maturity date. Bonds of similar risk are currently selling at
a rate of 14 percent .You are planning to buy 10 bonds with $10,000.Can you make it ?
Marks 5
2. The Xerox Company last paid their dividend of $2.5 to the stockholders. For the first 4
years the dividend will grow at a 6% and then the rate of growth changes to 4% percent
per year for the next 3 years .After that the dividend will grow at 3% for the foreseeable
future. The required rate of return is 8 percent. If you want to buy the stock maximum
how much you should pay for it? Marks 10
3. John borrowed $35,000 from a bank at 12 percent semiannually compounded interest to
be repaid in 5 years . Calculate the total interest paid in the 4th year. 5 marks

4. There are two projects, A and B. the following probability distribution for the projects are
given below
A B
______________ ______________
Initial Investment $9,000 $9,000
Annual rate of return
 Return Prob. Return Prob.
___________ ______ ____
Pessimistic 9% 0.25 11% 0.30
Most Likely 15 0.50 18 0.45
Optimistic 25 0.25 23 0.25

a. Compute expected rate of return for each project.

b. Compute variance and standard deviation of rate of return for each project.
c. compute the coefficient of variance.
c. Which project should you take?
 Analytical question:
Total marks 40

1. The capital structure of Index company is below

Source Target market
proportions
___________________________________
Long-term debt 40%
Preferred stock 10
Common stock equity 50
PREFERRED STOCK: The firm has determined it can issue preferred stock at $75 per
share par value. The stock will pay an $6.00 annual dividend. The cost of issuing
and selling the stock is $2.9 per share.
DEBT: The firm can sell a 15 year, $1,000 par value, 11 percent bond for $900. A
flotation cost of 2.5 percent of the face value.
2. Projects X and Y have the following expected net cash flows:
(7)

Project X Project Y
Year Cash Flow Cash Flow
0 -$500,000 -$500,000
1 250,000 350,000
2 250,000 350,000
3 250,000 300,000
4 200,000 200,000
5 150,000
Both the projects are of the same company, Deccan Pharma. The most recently paid
dividend was $2 and it is growing at 5% for the infinite period of time. Moreover, the
stock is selling for $45.
Assume you are a finance manager of the company. Which project you should Choose
based on NPV? Would your decision change if payback method was used? Or
Discounted Pay back period?
Which method you think is the best to find out the solution and why? Why you are not
choosing the other two methods? Total 22