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Assignment On Fundamentals of Finance
Assignment On Fundamentals of Finance
Assignment on Fundamentals
of Finance
Equation on MS-Word
Submitted To:
Md. Zillur Rahman
Assistant Professor,
Department of Business Administration.
Shahjalal University of Science and
Technology, Sylhet.
Sylhet -3114,
Bangladesh Submitted By:
On behalf of the Group - 09
ISMAIL ALI (Leader)
1st year 2nd semester
Department of Business Administration
Finance
Finance
INVESTMENT SECTOR
Businesses
Government
Households
FINANCIAL INTERMEDIARIES
Commercial Banks’ Savings Institutions Insurance Companies Pension Funds Finance Co
FINANCIAL BROKERS
Investment Bankers
Mortgage Bankers
SECONDARY MARKET
Security Exchange
OTC Market
SAVINGS SECTOR
Household sectors
Businesses
Government
List of Formulas of Finance:
Present Value of
Single Amount PV =
FV
1
( 1+ i )n
Present Value of
mixed or uneven cash FV 1 FV 2 FV n
2 PV = 1
+ 2
+ ⋯+
flow ( 1+ i ) ( 1+1 ) ( 1+i )n
Present Value and Future Value of money where interest has been
8 charged more than once a year.
a) Present Value of Single FV
PV =
Amount i n ×m
( )
1+
m
n ×m
b) Future Value of Single i
Amount
FV =PV 1+ ( ) m
Ordinary Annuity PV A= A
{ ( )
1− 1+
i
m
m
}
d) Present Value of Annuity Due i −t × m
PV A=
{ }( )
( )
1+
m
m
i
1+
i
m
Ordinary Annuity FV A= A
{ }
( ) 1+
m
i
m
−1
t×m
i
FV = A
A
( )
{
1
1+
m
i
m
−1
} (1+ mi )
Interest Rate Computation FV
9
i= ( ) −1
PV
n
m
i −t ×m
A cash flow statement segregates the cash payments and cash receipts into three
categories. These are operating, investing, and Financing activities.
Brand
Ratios Basic Computation Measure of
Category
Liquidity Cash Ratio Cash plus cash equivalents Adequacy of
and = Current liabilities available cash
Efficiency
Current Current assests Short-term debt
Ratio = Current liabilities paying ability
Underwriter
List of Formula:
Irredeemable/perpetual bonds or debentures: Debt issued at par
1. Before-tax cost of Debt Ki=
1
NSV
Preferred
Share/Stock
Dp
1. Cost of Kp=
NSV
Perpetual/Irredeemable
preferred stock
2. Cost of redeemable Dp+
MV −NSV
n
preferred stock Kp=
MV −NSV
2
Common
Share/Stock
1. CAPM K j=b j + [ b j × ( K m −R f ) ]
EXAMPLE 3: Investment and cash inflows of Bennett Company are given below:
Project A
Initial Investment 42,000
Year Operating Cash Inflow
1 14,000
2 14,000
3 14,000
4 14,000
5 14,000
SOLUTION: We know,
n
CF t
CF 1 CF 2 CF 3 CF n =∑ −Outlay
NPV = + + +⋯ ⋯+ −Outlay ( 1+r )t
( 1+r )1 (1+r )2 (1+ r )3 ( 1+ r )n t =1
CF 1 CF 1 CF 1 CF 1 CF 1
In project A, NPA= ( 1+r )1 + ( 1+r )2 + ( 1+r )3 + ( 1+r )4 + ( 1+ r )4 −Outlay
¿ , NPA=11,071.02
EXAMPLE 4: Investment and cash inflows of Sen Company are given below:
Project A
Initial Investment 45,000
Year Operating Cash Inflow
1 28,000
2 12,000
3 10,000
4 10,000
5 10,000
¿ , NPA=55,924−45,0 00
NPA=10,9 2
Requirements:
a. Calculate the NPV of the project
b. Calculate IRR.
c. Assess the acceptability of the project.
d. Calculate the PBP (payback period) of the project
e. Find out the profitability index of the project.
SOLUTION:
a. We know,
CF 1 CF 2 CF 3 CF n
NPA= 1
+ 2
+ 3
+ ⋯ ⋯+ −outlay
( 1+r ) ( 1+r ) ( 1+r ) ( 1+r )n
n
CF t
=∑ −Outlay
t =1 ( 1+r )t
10,000
(1 . 12,000 15,000 19,000 37,500
(1 . (1 . (1 .
17)1 17)2 17)3 17)4
8,547.01 8,766.16. 9,365.56 10,139.35 37,500
681.92
If we compare the NPV at 16% and NPV at 17% discount rate then the new NPV at 17% (-
681.92) is closest to zero. So this discount rate is more acceptable to calculate IRR. Now, it
is clear that IRR will be somewhere in between 15% and 17%.
To calculate the IRR
C
We know IRR = X (B A)
A+ C
D
Here, A = lower discount
rate, B = higher discount
rate
C = NPV of lower discount rate = 995.42 (at 15%)
D = NPV of higher discount rate = -681.92 (at 17%)
995.42 (681.92)
= 0.15 +
995.42
X (.17 .15)
995.52
¿ 0 .15+ × ( .17−15 )
995.42−(−681.92 )
¿ 0.15+.59345 ×0.0 2
¿ 0.15+.59345 ×0.0 2
= 0.15 + 0.0119
= 0.1619 or 16.19%.
c. Since the NPV is positive and IRR shows 16.19%, which is greater than the
discount rate, so the project is acceptable.
d.
38,495.42
= 37,500
= 1.03
List of Formulas:
Dividend Payment
1. Dividend Return RD Market Value of the share
n
5. b. Standard Deviation σ x=
√∑ (
x=1
R x−R )2 Pr x
σx
c. Coefficient of variation CV=
R
Expected Return ∑ Rx
x =1
R p=
n
6.
n
Standard Deviation
n
7. Portfolio Expected Return R P =∑ W j R j
j=1
9. Ri=R f + ( Rm −Rf ) β
Required Rate of Return (CAPM)
Risk Return
EXAMPLE 1: The earnings of a business for the last five years have been
given. Calculate the average return, standard deviation and CV.
Year 2009 2010 2011 2012 2013
Earnings 0.03 0.07 0.09 0.11 0.06
R x
Here,
x1
R
n R = Average Return/Expected Return
0.03 0.07 0.09 0.11 0.06 N = Number of years
5
Rx = Return of each year
0.072
7.20%
Standard Deviation,
σ P=
√ ∑ ( R p −R )2
x=1
n−1
.03 .0.072 2 .07 .072 2 .09 .072 2 .11 .072 2 .06 .072 2
51
0.001764 .000004 .000324 .001444 .000144
51
0.00368
4
0.00092
0.30331
3.03%
σx
CV =
R
0 . 0303
or , CV =
0 . 072
or , CV =0 . 4208
or , CV =42. 08%
EXAMPLE 2: Star Cable System Ltd has forecasted returns on its share
with the following probability distribution:
Return% -20 -10 -5 5 10 18 20 30
Probability 0.05 0.05 0.10 0.10 0.15 0.25 0.25 0.05
R R Pr
n
2
x x x
x1
20 112 .05 10 112 .05 5 112 .10 5 112 .10 10 112 .15
18 112 .25 20 112 .25 30 112 .05
150
12.25
R R Pr
n
x
2
x x
x1
SOLUTION:
Here,
We know, Expected Return, R = Expected Return
Rx = Return
n Pi= Probability
R= ∑ R x×Pr x = (18.5 × .25) + (10.5 × .25) + (1.0 × .25) + (-6.0 × .25)
x =1
= 4.63 + 2.62 + 0.25 + (-1.50)
= 6% or 0.06
Standard deviation
n
σ x=
√∑ (x=1
R x−R )2 Pr x
18.5 62 .25 10.5 62 .25 1 62 .25 6 6 2 .25
86.375
9.29%
CV x
R
9.29
or, CV
6
or, 1.55
CV 155%
or,
CV
Calculate Expected rate of return, standard Deviation and CV for both company.
SOLUTION: Company A
n
R= ∑ R x×Pr x
x =1
= (13 × .25) + (15 × .5) + (17 × .25)
= 3.25 + 7.50 + 4.25
= 15%
Standard deviation
n
σ x=
√∑ (x=1
R x−R )2 Pr x
13
152 .25 15 152 .5 17 152 .25
2
1.41%
CV x
R
1.41
or, CV
15
or, 0.094
CV 9.4%
or,
CV
Company B
n
R= ∑ R x×Pr x
x =1
= (7 × .25) + (15 × .5) + (23 × .25)
= 1.75 + 7.50 + 5.75
= 15%
Standard deviation
n
σ x=
√ ∑ ( R x−R )2 Pr x
x=1
R
or, 5.66
CV 15
or, 0.3773
CV 37.73%
or,
CV