Shahjalal University of Science and Technology

Assignment on Fundamentals
of Finance
Equation on MS-Word

Course No: BUS - 127

Course Title: Computer Application in Business

Submitted To:
Md. Zillur Rahman
Assistant Professor,
Department of Business Administration.
Shahjalal University of Science and
Technology, Sylhet.

Date of Submission: 28 September 2020

Sylhet -3114,
Bangladesh Submitted By:
On behalf of the Group - 09
ISMAIL ALI (Leader)
1st year 2nd semester
Department of Business Administration

SL NAME Reg. No.

01 ISMAIL ALI (L) 2019731078
Font name:
Times New Roman 02 Tahmid Choudhury 2019731091
Font Size:14
Equation Font size:12 03 Md Azharul Islam Aman 2019731060
Line Space: 1.5
MS-Word-2016 04 Towfiqul Islam Sourov 2019731057
05 Md Kawser Hamid 2019731021
 FINANCE
Classification of Finance

Finance

Basis of ownership Basis of sources Basis of duration

Public finance Private finance International

Finance

Personal Business Nonprofit

finance finance finance Internal finance External finance

Institutional finance Non-institutional finance

Sole Partnership Company State business

proprietorship finance
finance finance

Short-term finance Mid-term finance Long-term finance

Components of Financial Market:

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

Future Value of Single FV =PV (1+i )n

Amount
3

Present Value of 1−( 1+i )−t

Annuity/ Ordinary
PV A= A { i }
4
Annuity

Present Value of 1−( 1+i )t

Annuity Due
PV A= A { i }
( 1+ i )
5

Future Value of ( 1+i )t −1

Annuity/ Ordinary
FV A= A { i }
6
Annuity

Future Value of ( 1+i )t −1

Annuity Due
FV A= A { i }
( 1+ i )
7

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

c) Present Value of Annuity/ i −t ×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

e) Future Value of Annuity/ i t×m

Ordinary Annuity FV A= A
{ }
( ) 1+
m
i
m
−1

f) Future Value of Annuity Due

t×m
i
FV = A
A
( )
{
1
1+
m
i
m
−1

} (1+ mi )
Interest Rate Computation FV
9
i= ( ) −1
PV
n

Effective Interest Rate i nom m

1
0
EIR= 1+ (
m
−1 )
The Rule 72 72
1 i=
n
1
 The Rule 69 69
n=0.35+
i
1
69
2 i=0.35+
n

Determining equal installments i

1
3
A=PV A
{ 1−( 1+i )−t }
Determining equal installments i
1
4
in case of multiple compounding A=PV A
{( ) }
1− 1+
m

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.

Operating Activities (Internal):

Making Money by selling goods or rendering services.

Investing Activities (Internal):

Include making and collecting

Financing Activities (External):

loans and
acquiringand
Raising money
sale of
by issuing stocks and bonds
investments
(Both debt and
equity)and
property,plant and equipment.

Operating Activities Investing Activities: Financing Activities:

Sales
When cash receipts (revenues) exceed cash payments of plant and equipment
(expenses) Issuance of debt
Sale of debt or equity securities Issuance of equity
Collection of loans to other entities

Inflows of cash Inflows of cash

Cash Pool

Outflows of cash Outflows of cash

Operating Activities Investing Activities: Financing Activities:

When cash expenditure (expenses) exceed cash payments
Purchase
(revenues)
of plant & equipment Payment of dividend
Purchase of debt or equity securities Redemption of debt
Loan to other entities Re-acquisition of equity share
Check list for Ratio:

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

Quick Ratio Quick assets Immediate short-

= Current liabilities term debt paying
ability
Accounts Net sales Efficiency of
Receivable = Average accounts receivable collection
Turnover
Days’ Sales Days∈ year Liquidity of
Uncollected = Receivable turnover receivables
Inventory cost of goods sold Efficiency of
Turnover = Average inventory inventory
Days’ Sales Days∈ year Liquidity of
in Inventory = Inventory turnover inventory
Total Net sales Efficiency of
Assets Average Total assests assets in
=
Turnover generating
revenues
Solvency Debt Ratio* Total liabilities Debt financing
= Total Assests (by creditor) i.e.
leverage
Equity Total equity Equity financing
Ratio* = Total assets (by owner)
Pledged Book value of pledge assets Protection to
assets to Book value of secured liabilities secured creditors
secured
=
liabilities
Times Income before interest and Ability to meet
interest income taxes interest payments
= Interest expense
earned (From the view of
profit)
Cash = Cash flows from operating Ability to meet
coverage activities interest payments
(from the view of
 before interset∧taxes cash flows)
Interest paid
Profitabilit Profit Net income Ability to
y margin ratio = Net sales generate net
income
Gross Grossmargin Ability to
margin ratio = Net sales generate gross
margin
ROE Net income− preferred Overall
= dividends profitability of
Average owners equity assets
ROA Net income Return on owner’s
= Average total assets investment
Financial ROE - ROA Efficiency of
Leverage = financial leverage
percentage
Earnings Net income−Preferred Net income on
per share dividends each equity or
= average no . of shares common shares
outstanding
Book value Owners’ equity applicable Book value of
per share ¿ common shares each equity share
= No . of common shares
outstanding
Quality of Cash flows operating ¿ activities ¿ The
¿ extent of
income ¿ Net income
company’s
= earnings
generated by its
operation
Fixed assets Net sales Revenue
assets ¿
turnover Avarage net ¿ generating
= capacity by fixed
assets
Market Price Markets price per Market value
earnings common share relative to
ratio EPS earnings
Dividend Annual dividends per Cash return to
yield ratio share each common
Market price per share share
Sources of working capital
Funds required maintaining the day to day operations of a business firm is
known as working capital. Generally, working capital of a business firm can be
financed from both short-term and long-term sources. Regular sources of
Sources of Working Capital

Long-term sources Short-term Sources

1. Issue of shares 1. Depreciation fund

2. Debenture 2. Provision for taxation
3. General reserve 3. Accrued expenses
4. Welfare fund 4. Trade Credit
5. Dividend equalization fund 5. Bank loan
6. Undistributed profit 6. Commercial paper
7. Sale of old asset 7. Public deposits
8. Insurance Company 8. Advance from customers
9. Leasing company 9. Governmental assistance
10. Financial institutions 10. Directors, loan
11. Non-government agencies
12. Relatives

working capital are as follows:

 Long Term Financing

Internal Sources External Sources

Owners Capital Institutional Sources

Retained Earnings Non-institutional

Commercial Bank

Depreciation Provident Common stock

Insurance company

Provident fund Preferred stock

Leasing Company

Sales of fixed assets Bond/debenture

Specialized Bank

Over use fixed assets Warrants

Investment Bank

Bad debt provision Convertible security

Development Bank

Accrued expense Financial Institution Money market lender

Underwriter
List of Formula:
Irredeemable/perpetual bonds or debentures: Debt issued at par
1. Before-tax cost of Debt Ki=
1
NSV

2. After-tax cost of debt Kd=Ki X ( 1−T )

Redeemable/Maturity bonds or debentures: Debt issued at premium or

discount
1. After-tax cost of debt I ( 1−T )+
MV −NSV
n
Kd=
MV + NSV
2

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 ) ]

2. Constant dividend model

Ke= ( DP1 )+ g
3. Zero dividend growth model D
Ke=
P
4. Cost of Retained Earnings
Kr=Ke= ( DP1 )+ g
5. Cost of New Common Stock D1
Kn=(
Nn )
+g

Weighted Average Cost of Capital

1. WACC WACC¿ ( W i × K i ) + ( W p × K p ) + ( W e × K e )
MATHEMATICAL PROBLEMS ON CAPITAL BUDGETING

EXAMPLE 1: Equal Future Inflow: Taka 12,00,000 is essential to invest in a

new project. It is expected that the project will return taka 2,00,000 in each of
the next 6 years. Calculate the payback period.
SOLUTION:
 Total investment
Payback Period =
Equal annual cash∈flow
12,00,000
¿
2,00,000
¿ 2Years

EXAMPLE 2: Unequal future inflow: HM Fazle Rabbi wants to invest in a new

project. He needs taka 2,00,000 as initial investment. He will receive taka
25,000, taka 34,000, taka 45,000, taka 50,000 taka 66,000 in the next five
years consecutively. Calculate the payback period.
SOLUTION:

Year Cash Flows Cumulative Inflows

(Tk.) (Tk.)
0 -
2,00,000
1 25,000 25,000
2 34,000 59,000
3 45,000 1,04,000
4 (a) 50,000 (c) 1,54,000
5 (d) 2,20,000
66,000
ICO - c
Payback period= a + a = the year of the cumulative inflow
d
near to the initial cash outflow
2,00,000 − 1,54,000
=4+
66,000 ICO = initial cash outflow
= 4 + 0.70 c = cumulative inflow of
= 4.70 Years the year a d = inflow of the
year of recovery

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

The cost of capital is 10%. Calculate the NPV of the project.

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

14,000 14,000 14,000 14,000 14,000

¿ , NPA= + + + + −42,000
( 1+r )1 (1+ r )2 ( 1+ r )3 ( 1+ r )4 ( 1+r )5

¿ , NPA=12,727.27+11,570.25+ 10,518.41+ 9562.92+ 8,692.90−42,000

¿ , NPA=53,071.02−42,000

¿ , 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

The cost of capital is 10%. Calculate the NPV of the project.

SOLUTION: 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
 CF 1 CF 1 CF 1 CF 1 CF 1
In Project A, NPA= + + + + −Outlay
( 1+r )1 ( 1+r )2 ( 1+r )3 ( 1+r )4 ( 1+ r )5

28,000 12,000 10,000 10,000 10,000

¿ , NPA= + + + + −45,000
( 1+1 )1 ( 1+1 )2 ( 1+1 )3 ( 1+1 )4 ( 1+1 )5
¿ , NPA=25,455+9,917+ 7,513+6,830+6,209−45,000

¿ , NPA=55,924−45,0 00
NPA=10,9 2

EXAMPLE 5: MJ Group is attempting to choose a project for expanding the

business capacity. The relevant cash flows for the project are shown in the
following table. The firm’s cost of capital is 15%.
Particulars Amount in Taka
Initial investment (cash outflows) 37,500

Year Cash inflows (unequal cash inflows)

1 10,000
2 12,000
3 15,000
4 19,000

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 12,000 15,000 19,000  37,500

 (1  .  (1  .  (1  .  (1  .
15)1 15)2 15)3 15)4
 8,695.65  9,073.72  9,862.74  10,863.31  37,500
 995.42
Here, NPV is 995.42
b. In order to calculate IRR, we have to apply trial and error method. At 15%
discount rate, NPV is positive. So, to get the actual IRR we need to increase
the discount rate.
Previously, we discounted the cash flows at 15% and found the NPV is Tk.
995.42. Since, the NPV is positive, the IRR is probably greater than 15%. If
we increase 1% discount rate from 15% to 16%, in that case we can get the
new NPV which may be nearest to zero (it may be negative amount). Let us try
with 16% discounting rate.
At 16% discount
rate, NPV

10,000 12,000 15,000 19,000  37,500

 (1  .  (1  .  (1  .  (1  .
16)1 16)2 16)3 16)4
 8,620.69  8,917.95  9609.87  10,493.53  37,500
 142.04
Here, at 16% discounting rate NPV is Tk. 142.04. Actually, we need a figure of NPV which
is close to zero. But this NPV is not nearest/close to zero. So, let’s try one more time. This
time we can take 17% discount rate. At 17% discounting rate NPV becomes

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%.

So, IRR is 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.

Initial Outlay 37,500

Years Cash inflows in Taka Cumulative cash inflows

1 10,000 10,000
2 12,000 22,000
3 (A) 15,000 (C) 37,000
4 19,000 (D) 56,000

Here, Payback period =

NCO  C
A+
D

Here, A = the year of the cumulative inflow near to the initial

cash outflow = 3 NCO = Net cash out flows = 37,500
C = Cumulative inflow of the year
= 37,000 D = Inflow of recovery
year = 19,000
If we put all the above information then the PBP will be
37,500  37,000
= 3+ 19,000
= 3+0.1316
= 3.13
years So the Payback Period of the project is
 3.13 years
e. Profitability index of the project is
= Present value of cash inflow/Present value of cash outflow

38,495.42
= 37,500
= 1.03
List of Formulas:

Dividend Payment
1. Dividend Return RD  Market Value of the share

Ending Value  Beginning Value

2. Capital Gain Return RC Beginning Value
CF t + Pt −Pt −1
Rt =
3. Pt −1
Determination of rate of return

4. Range of Return Range = Higher Return - Lower

Return
Measurement of Risk and Return where events can be assigned by
probabilities-
n

a. Expected return R= ∑ R x×Pr x

x =1

n
5. b. Standard Deviation σ x=
√∑ (
x=1
R x−R )2 Pr x

σx
c. Coefficient of variation CV=
R

Measuring Risk & Return by Using Historical data

n

Expected Return ∑ Rx
x =1
R p=
n
6.
n
Standard Deviation

Portfolio Risk and Return

σ P=
√ ∑ ( R P−R ) 2
x=1
n−1

n
7. Portfolio Expected Return R P =∑ W j R j
j=1

8. Portfolio Standard Deviation σ P=√ W 21 σ 21 +W 22 σ 22

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

SOLUTION: we know, Average Return,

n

R x
Here,
x1
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
51
 0.001764  .000004  .000324  .001444  .000144
51
 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

Calculate the Expected Return, Standard Deviation.

SOLUTION:
Here,
We know, Expected Return, R = Expected Return
n Rx = Return
Pi= Probability
R= ∑ R x×Pr x
x =1
= (-20 × .05) + (-10 × .05) + (-5 × .10) + (5 × .10) + (10 × .15) + (18 ×.25) + (20×.25) + (30×.05)
= 11
Standard deviation

R  R Pr
n
2
x  x x
x1

 20 112 .05  10 112 .05   5 112 .10  5 112 .10  10 112 .15

 18 112 .25  20 112 .25  30 112 .05
 150
 12.25

EXAMPLE 3: The rates of return and probabilities of a project of Star Cable

system are given below:
Return 20% 18% 11% 20% 15%
Probability 0.30 0.10 0.40 0.10 0.10

Calculate the expected return, standard deviation and CV.

SOLUTION:
Here,
We know, Expected Return, R = Expected Return
n
Rx = Return
R= ∑ R x×Pr x Pi= Probability
x =1
= (0.20 × .30) + (0.18 × 0.10) + (0.11 × 0.40) + (0.20 × 0.10) + (0.15 × 0.10)
= 0.06 + 0.18 + 0.044 + 0.02 + 0.015
= 0.157 = 15.7%
Standard deviation

 R  R Pr
n
x 
2
x x
x1

.20  .157 2 .3  .18  .157 2 .1 .11 .157 2 .4


 .20  .157 2 .10  .15  .157 2 .10
 0.00055  0.00005  0.00088  0.00018  0.000005
 0.001665
 0.041
 4.10%

CV 
x
4.10
R
or, CV 
15.7
or,  0.26
CV  26%
or,
CV

EXAMPLE 4: Calculate the Expected rate of return, Standard deviation and CV

from the following data of General Power Limited.
Return% 18.5% 10.5% 1% -6%
Probability 0.25 0.25 0.25 0.25

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  62 .25  10.5  62 .25  1 62 .25   6  6 2 .25
 86.375
 9.29%

CV  x

R
9.29
or, CV 
6
or,  1.55
CV  155%
or,
CV

EXAMPLE 5: Below are the data of Company A and Company B.

Company A Company B
Returns Probability Returns Probability
13% 0.25 7% 0.25
15% 0.50 15% 0.50
17% 0.25 23% 0.25

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
 152 .25  15 152 .5  17 152 .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

7 152 .25  15 152 .5  23 152 .25

 16  0  16
 32
 5.66%

CV  x

R
or, 5.66
CV  15
or,  0.3773
CV  37.73%
or,
CV