Finance for Managers

FIN 603
Table of Contents
Introduction:................................................................................................................................................2
Contents.......................................................................................................................................................2
Question # 1................................................................................................................................................3
Part-A:.....................................................................................................................................................3
Part-B;.....................................................................................................................................................4
Part-c:......................................................................................................................................................4
Question # 2................................................................................................................................................5
Question # 3................................................................................................................................................5
Question # 4................................................................................................................................................6
Calculation of IRR of Study......................................................................................................................8
Question # 5..............................................................................................................................................10
Bonds:....................................................................................................................................................10
Advantages of Bond...........................................................................................................................10
Disadvantages of Bond......................................................................................................................10
Equity.....................................................................................................................................................10
Advantages of Share:.........................................................................................................................10
Disadvantages of Share......................................................................................................................11
Conclusion.................................................................................................................................................12

1|Page
Contents:
This assignment consist of two parts, Part A and Part B. Part A is divided into three questions
while Part B is classified into two questions. Part A focus on risk and return relationship, risk
involve in stock. While Part B deeply concern about the discounting and general discussion about
sources of finance.
 Part A

Question # 1:
BSL ASB Dividend Dividend
Year Share Share of BSL of ASB
price price
2011 0.51 0.145 10.00% 8.80%
2012 0.41 0.173 5.00% 8.90%
]\’ 0.293 0.148 8.00% 8.70%
Y201
3
2014 0.257 0.129 8.00% 8.50%
2015 0.272 0.166 8.00% 7.75%
2016 0.236 0.138 10.00% 7.25%
2017 0.284 0.11 12.00% 8.25%
2018 0.448 0.133 12.00% 7.00%
2019 0.511 0.134 12.00% 7.50%
2020 0.362 0.135 10.00% 8.00%

Part-A: Critically analyse the basis of choosing the companies.

Selection of companies is dependent upon many factors which includes listing of company for
last 10 year so that data related to the company can easily be extracted. Along with this the next
important factor to consider is that both the companies ought to be operating in the same
industry, otherwise the result wouldn’t be extracted as per the requirements. It is sometime
difficult to have both indicators. Some other criteria’s for selection of company includes profit
outlook, dividend payout consistency, well established brand names etc. Debt and Equity both
type of finances are commonly used however both carries there advantages and disadvantages
along with them. (Hansen, 1982) During academic studies, It is assumed that Investor have
sufficient resources to invest anywhere in world in securities involving lower risk. However it is
not possible in practical life. Some of the factors have high impacts on mindset of investor about
certain market. These factors include political, legal, environment, ecological and social factors
in that part of world. PESTEL is one of the most important analysis involve in decision making. [
CITATION Elo02 \l 1033 ] Interest rate, economic situation of country, Law and order , Political
stability , global ranking of market in world top performing markets are vital part of the decision
making process of investor. These factors have long term effect on the mindset of investor while
investing. If funds are raise for long term then Equity financing is better [ CITATION Dau08 \l
1033 ] If funds are required for short term cash flow needs then debt financing is better option.
After selection of kind of instrument, type is also decided upon same basis
 Which is positive indicator for investors and it build satisfaction among them about their
investments, which lead to increase in foreign direct and indirect investment. Corporate financing
has impact on liquidity, solvency and profitability of company. Multiple financing options are now
a days available to entities. Which can be classified on the basis of nature, function and timeline.
There are two major sources of financing, which are debt and equity. Equity and Debt financing
both involve unique risks .These risks can be trigger down by analysis of financial viability of
those securities.

Part-c: Calculate the continuously compounded annual returns and the respective risk for both firms.
Which is the better investment of the two? Analyse your answer
BSL AS
B
Average Risk 2% 1%
Average Return 10% 8%
Formula:
risk = probability x loss
Average return: R= {V_f-V_i}/{V_i}
R = return
V_f = final value, including dividends and interest
V_i = initial value

By looking at the data and the calculation performed over it, it is visible that risk in BSL is high
that is at 2% on the other hand risk calculated for the ASB is at 1%. Along with this the
calculation for return demonstrates that in BSL it can vary from 8% to 12 % while in the case of
ASB it can vary from 7% to 9%.
Keeping these in view, if one is to take the investment decision it is in his favor to Invest in BSL
the recommended is based on the factor of return percentage calculated which states that it is
higher in BSL as compared to ASB. (Lerner, 2003)
Question # 2: calculate the weight (proportion) of the two assets that produce the lowest portfolio
variance? (Use the Goal Seek function)

Stock Return Std. deviation Correlation Weigh

t
m 0.07 0.12 -1 0.5
n 0.2 0.5 -1 0.5
Portfolio 0.135
Portfolio variance 0.0361

Question # 3: Calculate the expected return, the variance, the standard deviation, and the
correlation for each share.
Astro OCK
Group
Drop 0.022 0.0375
Increase 0.136 0.18
Net Impact 0.114 0.1425
Effect on Co variance 0.001026 0.001283
Existing Prices 0.79 0.44
Impact on Prices 0.88006 0.5027
Std. Deviation 0.08 0.06
 Correlation 0.00077 0.00171
Variance 0.0064 0.0036
Expected return 10% 12

Formula

E[R]=\sum _{i=1}^n R_i P_i

E[R] = expected return
R_i = return in scenario i
P_i = probability for the return Rᵢ in scenario i
n = number of scenarios
Question # 4: is it worthwhile to quit your current job and do your postgraduate? What is the IRR
of your study?
Age Discount factor at Graduatio Present value of Discount factor at P.V @15%
17% n grad. 15%
30 1.00 (25,000.0 (25,000. 1 (25,000.0
0) 00) 0)
31 0. (25,000.0 (23,364. 0.869565217 (20,316.9
93 0) 49) 4)
32 0. 50,000.0 43,671. 0.756143667 33,022.
87 0 94 26
33 0. 51,750.0 42,243. 0.657516232 27,775.
82 0 42 73
34 0. 53,561.2 40,861. 0.571753246 23,362.
76 5 62 76
35 0. 55,435.8 39,525. 0.497176735 19,650.
71 9 03 92
36 0. 57,376.1 38,232. 0.432327596 16,528.
67 5 15 81
37 0. 59,384.3 36,981. 0.37593704 13,902.
62 2 57 74
38 0. 61,462.7 35,771. 0.326901774 11,693.
58 7 89 89
39 0. 63,613.9 34,601. 0.284262412 9,835.
54 6 78 99
40 0. 65,840.4 33,469. 0.247184706 8,273.
51 5 95 26
41 0. 68,144.8 32,375. 0.214943223 6,958.
48 7 14 82
42 0. 70,529.9 31,316. 0.18690715 5,853.
44 4 14 21
43 0. 72,998.4 30,291. 0.162527957 4,923.
41 9 78 26
44 0. 75,553.4 29,300. 0.141328658 4,141.
39 3 92 06
45 0. 78,197.8 28,342. 0.122894485 3,483.
36 0 48 13
46 0. 80,934.7 27,415. 0.10686477 2,929.
34 3 39 74
47 0. 83,767.4 26,518. 0.092925887 2,464.
32 4 63 27
48 0. 86,699.3 25,651. 0.080805119 2,072.
30 0 20 75
49 0. 89,733.7 24,812. 0.070265321 1,743.
28 8 14 43
50 0. 92,874.4 24,000. 0.061100279 1,466.
26 6 53 44
51 0. 96,125.0 23,215. 0.053130677 1,233.
 24 7 46 45
52 0. 99,489.4 22,456. 0.046200589 1,037.
23 4 08 48
53 0. 102,971.5 21,721. 0.040174425 872.
21 7 53 65
54 0. 106,575.5 21,011. 0.034934283 734.
20 8 02 00
55 0. 110,305.7 20,323. 0.030377637 617.
18 2 74 39
56 0. 114,166.4 19,658. 0.026415337 519.
17 2 94 30
57 0. 118,162.2 19,015. 0.022969858 436.
16 5 89 79
58 0. 122,297.9 18,393. 0.01997379 367.
15 3 88 40
59 0. 126,578.3 17,792. 0.017368513 309.
14 6 21 02
60 0. 131,008.6 17,210. 0.015103054 259.
13 0 22 93
61 0. 135,593.9 16,647. 0.013133091 218.
12 0 27 63
62 0. 140,339.6 16,102. 0.011420079 183.
11 9 73 89
63 0. 145,251.5 15,576. 0.009930503 154.
11 7 01 68
64 0. 150,335.3 15,066. 0.00863522 130.
10 8 51 10
65 0. 155,597.1 14,573. 0.007508887 109.
09 2 68 43
66 0. 161,043.0 14,096. 0.006529467 92.
09 2 97 05
67 0. 166,679.5 13,635. 0.005677798 77.
08 2 86 42
Net Present value 883,517.
20 162,119.15
Calculation of IRR of Study:

Discount Present Discount factor

Age factor at 17% Graduation value of at 15% P.V @15%
grad.
30 1.00 (25,000.00) (25,000.00) 1 (25,000.00)

31 0.93 (25,000.00) (23,364.49) 0.869565217 (20,316.94)

32 0.87 50,000.00 43,671.94 0.756143667 33,022.26

33 0.82 51,750.00 42,243.42 0.657516232 27,775.73

34 0.76 53,561.25 40,861.62 0.571753246 23,362.76

35 0.71 55,435.89 39,525.03 0.497176735 19,650.92

36 0.67 57,376.15 38,232.15 0.432327596 16,528.81

37 0.62 59,384.32 36,981.57 0.37593704 13,902.74

38 0.58 61,462.77 35,771.89 0.326901774 11,693.89

39 0.54 63,613.96 34,601.78 0.284262412 9,835.99

40 0.51 65,840.45 33,469.95 0.247184706 8,273.26

41 0.48 68,144.87 32,375.14 0.214943223 6,958.82

42 0.44 70,529.94 31,316.14 0.18690715 5,853.21

43 0.41 72,998.49 30,291.78 0.162527957 4,923.26

44 0.39 75,553.43 29,300.92 0.141328658 4,141.06

45 0.36 78,197.80 28,342.48 0.122894485 3,483.13

46 0.34 80,934.73 27,415.39 0.10686477 2,929.74

 47 0.32 83,767.44 26,518.63 0.092925887 2,464.27

48 0.30 86,699.30 25,651.20 0.080805119 2,072.75

49 0.28 89,733.78 24,812.14 0.070265321 1,743.43

50 0.26 92,874.46 24,000.53 0.061100279 1,466.44

51 0.24 96,125.07 23,215.46 0.053130677 1,233.45

52 0.23 99,489.44 22,456.08 0.046200589 1,037.48

53 0.21 102,971.57 21,721.53 0.040174425 872.65

54 0.20 106,575.58 21,011.02 0.034934283 734.00

55 0.18 110,305.72 20,323.74 0.030377637 617.39

56 0.17 114,166.42 19,658.94 0.026415337 519.30

57 0.16 118,162.25 19,015.89 0.022969858 436.79

58 0.15 122,297.93 18,393.88 0.01997379 367.40

59 0.14 126,578.36 17,792.21 0.017368513 309.02

60 0.13 131,008.60 17,210.22 0.015103054 259.93

61 0.12 135,593.90 16,647.27 0.013133091 218.63

62 0.11 140,339.69 16,102.73 0.011420079 183.89

63 0.11 145,251.57 15,576.01 0.009930503 154.68

64 0.10 150,335.38 15,066.51 0.00863522 130.10

65 0.09 155,597.12 14,573.68 0.007508887 109.43

66 0.09 161,043.02 14,096.97 0.006529467 92.05

67 0.08 166,679.52 13,635.86 0.005677798 77.42

Formula:
NPV= \sum\limits_{n=0}^N {C_n}{(1+r)^n}
NPV = Net Present Value
N = total number of periods
n = non-negative integer
C_n = cash flow
r = internal rate of return

Question # 5:
Analyse the FOUR (4) advantages and disadvantages of fund raising either from bond or share to the
company’s performance.
Bonds:
Bonds are units that are issued by companies and are debt instrument in nature. Due to the
enormous sizes of companies they need great amount of finance which mostly is not obtained
completely from the shares issue to the shareholders so companies need another mode of finance.
Here comes the concept of debt instruments that are issued to public in small chunks and carries
a fixed rate of return which is written on the face of the debt instrument issued. Debt is major
source of finance. Bonds evolve as major source of debt financing. (Hansen, 1982)
Advantages of Bond:
It has many advantages but some are given below;
1) For companies when calculating the tax figure at the yearend, return given on bonds can be
treated as expense of entity.[ CITATION Duq18 \l 1033 ]
2) Additional amount payable on bond is tax admissible expense.
3) Its issue cost is less than the equity financing due to the fact that it is paid for a said portion of
time whereas shareholders are there till the dissolution of the company (Wu, 2005).

Disadvantages of Bond:
It has following disadvantages;
1) It effect the liquidity ratio of company.
2) Shareholders need high profit figures from the company whereas the interest paid on the
bonds decrease profit figure of the entity.
3) It is a liability and the interest amount of it require constant outflow of resources.
4) Its long term financing carry much higher cost. (Mansi, 2002)
Equity:
It is the amount that has been collected from shareholders in return from the ownership provided
to them in the shape of shares (Made, 2012) it is one off source of finance of entity, which can be
used by entity for financing its activities. As was the case of debt it also has many benefits along
with their cost in form of disadvantages. (Fosber, 2004) Some of them are given below:
Advantages of Share:
Its advantages are too many but some are given below:
1) It does not carry constant cost like in form of interest on debt, rather if the company is in the
position of distributing the profits they do it otherwise leave it.
2) It is cheaper source of finance as compared to debt finance.
3) It did not affect liquidity of company (Mande, 2012)
Disadvantages of Share:
Its disadvantages include following but not limited to them:
1) For the calculation of tax figure dividend cannot be treated as expense and hence a higher
amount of tax is paid.
2) Its transaction cost is high.
3) Most of the times it has been seen that compliance of regulation is difficult in the case of
share issue and its later changes that are made to it. (Minnis, 2011)
Both type of financing carries advantages and disadvantages. However availability of all options
is almost impossible for entity. So, management of companies decide best option. This is
dependent upon the use of finance.[ CITATION Abo05 \l 1033 ]
Conclusion:
It has been proved that risk in portfolio would be decreased if they are negatively correlated with
each other, which means that the decrease in one would lead to the increase in the other just like
the decreases risk in stock, which would lead toward maximization of profits and capital gains.
(Zhengfei, 2004)
 References
Abor, J., 2005. The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. The
journal of risk finance.

Elgonemy, A.R., 2002. Debt-financing alternatives: Refinancing and restructuring in the lodging industry. Cornell
Hotel and Restaurant Administration Quarterly, 43(3), pp.7-21.

Van Assche, K., Duineveld, M., Beunen, R. and Teampau, P., 2011. Delineating locals: transformations of
knowledge/power and the governance of the Danube Delta. Journal of Environmental Policy & Planning, 13(1),
pp.1-21.
Chin, K.Y. and Zakaria, Z., 2018. Board Characteristics and Capital Structure of Malaysia Consumer Products
Sector. International Journal of Banking and Finance, 13(1), pp.71-94.

Mitchell, G., Tetlock, P. E., Newman, D. G., & Lerner, J. S. (2003). Experiments behind the veil: Structural
influences on judgments of social justice. Political Psychology, 24(3), 519-547.

Hansen, R.S. and Crutchley, C., 1990. Corporate earnings and financings: An empirical analysis. Journal of
Business, pp.347-371.

Mande, V., Park, Y.K. and Son, M., 2012. Equity or debt financing: does good corporate governance
matter?. Corporate Governance: An International Review, 20(2), pp.195-211.Mande., V. P. Y., 2012. Equity or
debt financing.

Mansi, S.A. and Reeb, D.M., 2002. Corporate international activity and debt financing. Journal of international
business studies, 33(1), pp.129-147.

Susanne Condron, D., Garraza, L.G., Walrath, C.M., McKeon, R., Goldston, D.B. and Heilbron, N.S., 2015.
Identifying and referring youths at risk for suicide following participation in school‐based gatekeeper
training. Suicide and Life‐Threatening Behavior, 45(4), pp.461-476.

Minnis, M., 2011. The value of financial statement verification in debt financing: Evidence from private US
firms. Journal of accounting research, 49(2), pp.457-506.

Slater, D. and Artist, L., 2010. Scott C. Roper, Ph. D., Editor Department of History, Geography, Economics, and
Politics| Castleton State College| Leavenworth Hall| 6 Alumni Drive| Castleton, VT 05735| scott. roper@ castleton.
edu|(802) 468-1270.

Weist, M.D., Mills, C., Huebner, S., Smith, B. and Wandersman, A., 2010. School, community and clinical
psychology training and working together in the interdisciplinary school mental health field. The Community
Psychologist, 43(4), p.32.

Wu, X. and Wang, Z., 2005. Equity financing in a Myers–Majluf framework with private benefits of control. Journal

of Corporate Finance, 11(5), pp.915-945.

Zhengfei, L. and Kangtao, Y., 2004. The Puzzle of Equity Financing Preference in China's Listed Companies
[J]. Economic Research Journal, 4, pp.50-59.

.
.