Assesment Task – Tutorial Questions

Question No.1
A).
Meaning of Corporate Finance
Corporate finance is the financial division which deals in the financial activities
like capital budgeting, financial structure, investment etc. Also Corporate
finance maximizes the shareholders fund through long term and short term
financial planning and implementation of various strategies in the corporates
sector. Corporate finance deals in the business decision in which the company
takes the decision in their daily routine. Corporate finance explains that the
financial activities which are regulated in the business operation should be
calculated effectively.Corporate finance serves their financing activities in
investment sector to know the investmemt plan about the company.The three
main questions in the corporate finance are capital budgeting,capital structure
and working capital management.Corporate Finance maximizes the corporate
fund in such a way so that it helps in the financial activities to deals in
investment function.
The three important questions of corporate finance are as explained below.
 Capital Budgeting
 Capital Structure
 Working Capital Management
Capital Budgeting:-
Capital budgeting refers to a process in which the planning should be done and
also used to determine the long term investment of an organization such as
installation of machinery,new plants,also research and development activites
etc.In a capital budgeting a business determines and evaluates the investment
factor of the business..Also we can say that it is a business appraisal.also we
can make the decision regarding the long term investment plan and long term
assests as well.In capital budgeting there are two techniques Non- Discounting
techniques and Discounting techniques..In non discounting techniques we can
calculate payback period and accounting rate of return.In discounting
techniques a corporates can calculate Net Present Value( NPV ) , Profitability
Index ( PI ) and Interest Rate of Return ( IRR ).
Capital Structure:-
Capital structure is the Assests= Debt + Equity. Capital structure refers to how
a company exapnd their funds and utilizes its overall operation in the
business.As we know company can utilizes their capital structure in different
aspects of investment in which company can utilizes their funds.It is a mix of
capital which is a combination of debt and equity.Working Capital also meets
the day to day operations of the business activities in the company which is
very necessary to meet those activites such as payment of electricity
bill,purchase of stationery item,billing activites in all these activities need the
funds to operate it.Also capital structure helps to maintain the debt and equity
of the business firm or a company.
Working Capital Managemet:-
A business strategy in which a company can designed and monitor by using
curren assets and current liabilities..Also we derived working capital
Working Capital= Current Assets - Current Liabilities
Through the current assets and current liabilites a business firm can calculates
their total working capital of the firm.Also we can say working capital
managemet helps business to boost their activities and financing
activities.Working Capital Management refers to ensure and utilizes all the
resources for day to day operating exoenses. It also includes the management
of inventories,accounts receivable,payable and cash.The company can uses
their working capital very effectively and effeciently for the increment of
capital structure of the company.
B)
Owners equity = Total Assets – Total Liabilities
Given, CA= $7920
Fixed Assets= $17700
Total Assets Of ( A) = 25620
CL = 4580
Long term debt = 5890
Total labilities of B = 10470
Owners equity (A-B)= $15150
The balance sheet is give bellows

Balance sheet
Assets Liabilities
Current asset = $7920 Current Liabilities = $4580
Fixed Assets =17700 Long term debt=5890
Total Asset= 25620 Total liabilities =10470

C)
Given,
Current assests= $7920
Fixed assets=$17700
Current liabilities=$4580
Long term Debt=$5890
Net working capital=?
Net working capital = CA-CL
=$7920-$4580
=$3340 Net working Capital.
D)
Calculation of return on assets ,
The return on equity = 30%
Return on assets= net income
30% =net income/15150
Net income =15150*30%
Net income= $4545
Return on Asset= 4545/25620
Return on Assets =17.74%
E)
Given , price earning of the company
PE Ratio= Market price per share/ Earning per share
Market price per share= $12
Earning per share = Net income/No. of o/s share
EPS = 4545/2000
EPS= $2.27
P/E Ratio = $12/$2.27
Price Earning Ratio =5.29

Question 2.
A) Calculation of Effective Interest Rate=?
Effective Rate=(1+r/m)n-1
Whereas, r = annual nominal rate of int.
M=no. of compounding period in a year
N= no. of compounding period rate
Bank A=(1+0.085/2)2-1
= (1.0425)2-1
=1.086-1
= 0.86
Bank B= (1+0.0845/4)4-1
=(1.0211)4-1
=1.087-1
=0.087
B) Calculation of maturity amount A=P(1+R/N)NT
Whereas, a= maturity amount after time
R= interest rate
N =no.of compounding period in a year
T= time given
Maturity amount in bank B
A=$12000 (1+0.084/4)4*15
=$120000 ( 1.0211)60
=$120000*3.50
=$420645.057
So we can say that money accumulation after 15 years fron now if choose
to no invest in bank B = $420645.06

C)
Calculation of annual interest A=P (1+r)t
Whereas, A= maturity amount
R= annual interest rate
And T = time
Here, A=$450000 r= ? t =10 years
$450000 =$120000 (1=r)10
3.75= (1+r)10
1.14=1+r
R=0.1413 or 14.13% is annual interest rate required
Question 4)
A)
Calculation of current price of the corporate bond.
Bond price = [ coupon payment * 1-(1+r)-n] + face value /(1+r)n
=[
1000*10%*1-(1+0.084)-20] + 1000/(1+0.084)20
=[100*0.80074265/0.084] +
199.25735
=953.265+199.257
=1152.522
The current price of corporate bond is $1152.52

B)
Calculation of current price of ordinary share if average return of the share in
the same industry is 9%
It is assumed that share price should be calculated under dividend discount
model since dividend growth rate given in the question is
P0 =D1/ke
Whereas
Po= current market price
Ke= req.rate of return that is 9% p.a
G= dividend growth rate =3% p.a
D1=expected dividend =$7.5 per share
Therefore current price of common share = $7.5/0.9-.03
=$125 per share
C)
Calculation of current value of preferred share if average return of the share if
average return of the share in the same industry is 12%
Dividend is fixed and then formula for preferred share price calculation is
Po=cash flow after tax/r
Po=current market price
R= rate of return after tax=12% average return of the industry assumed 12% is
after tax return
Cash flow after tax = $14*(1-0.3)
= $9.80
Therefore current value of preferred share po=$9.80

D)
Calculation of current market value and capital structure of thefirm and
weights of equity fundings
Current market value of firm.
Particulars computation Market value in $
Commonshare 65000 share *$125 8125000
Preferred share 40000 share * $81.67 3266800
Corporate bond 2500 bonds *$1163.15 2907875
Total market value 14299675

Current capital structure of firm

particulars computation Market value in $
EQUITY FUNDS
Common share 65000 share * $125 8125000
Preferred share 4000 share * $81.67 3266800
DEBT FUNDS
Corporate bond 2500 bond *$11663.15 2907875.41
Total value of structure 14299675.41
of firm

Total weight of equity fund =Equity fund / total fund

= 0.7966
Therefore , weight of debt fund =1-0.7966/14299675
=0.2034

E)
Computation of weighted average cost of capital using dividend constant
growth model foe cost of ordinary share .
Type of fund Proportion Computation cost WACC
of capital
1 2 3 4=2*3
Common share 0.57 9%*0.57 5.11
Preffered share 0.23 12%*0.23 2.74
Debt bond 0.20 7% *0.20 1.42

1.00 WACC 9.27

Therefore WACC of firm 9.27%.

Question 5.
A) Equipment 1
Year Cash flow PV@8% Discounted value
1 $86000 0.9259 $79629.63
2 $93000 0.8573 $79732.51
3 $83000 0.7938 $65888.08
4 $75000 0.73 $55127.24
5 $55000 0.68 $37432.08
PV of cashflow A 317809.53 $
Investment B $ 186000
Profitability index 1.71
(a/b)

Equipment 2
year Cash flow in $ pv@8% Discounted value
in $
1 97000 0.92 89814.81
2 84000 0.85 72016.46
3 86000 0.79 68269.57
4 75000 0.73 55127.24
5 63000 0.68 42876.74
Pv of cashinflows 328104.83
A
INVESTMENT b 195000
Profitability idex 1.68

As per PI equipment 1 should be selected as it higher PI of two

B) Equipment 1
year Cash flow in pv@8% Discounted Cumulative
$ value in $ value in$
0 186000 1.000 186000 186000
1 86000 0.92 79629.63 106370.37
2 93000 0.85 797321.51 26637.86
3 83000 0.79 65888.08 39250.22
4 75000 0.73 55127.24 94377.45
5 55000 0.68 37432.08 131809.53
Discounted 2.49
payback
period

Equipment 2
Year Cash flow in $ pv@8% Discounted Cumulative
value in$ Value in $
0 195000 1.00 195000 195000
1 97000 0.92 89814.81 105185.19
2 84000 0.85 72016.46 33168.72
3 86000 0.79 68269.57 35100.85
4 75000 0.73 55127.24 90228.09
5 63000 0.68 42876 133104.83
Discounted 2.49
pay back
period

Both equipments are rejected as their payback period is higher the maximum
criters that is 2.