Finance

ACC00716 Finance Session 1, Assessment : Business Case Studies 

1. TVM and bond valuation questions

1a.

Payment per period (CF)$10,000
Number of years (n)4
Annual interest rate (r)7.0%
No. of compounding periods per year (m)12
Number of periods (mxn)48
Periodic rate (r/m)0.6%
Future value (FV)-$552,092.36

The amount of $552,092.36will be received byBGA from the bank.

1b.

Present value (PV)$1,438.28
Number of years (n)5
Annual interest rate (r)10.1%
No. of compounding periods per year (m)1
Number of periods (mxn)5
Periodic rate (r/m)7.4%
Future value (FV)-$2,055.25

 

Annual operating revenue for BGA will be $2,055.25millionin 5 years.

 1c.Effective Annual Rate (EAR)

Loan A
Stated annual rate (r)7.00%
No. of compounding periods per year (m)2
EAR7.12%

 

Loan B
Stated annual rate (r)6.95%
No. of compounding periods per year (m)12
EAR7.18%

 

Loan C
Stated annual rate (r)6.97%
No. of compounding periods per year (m)4
EAR7.15%

BGA should choose the loan Abecause I is available on the lowest rate of7.12%.

1d.

Loan principal (PV)$811,000
Term of loan in years (n)10
Annual interest rate (r)3.8%
No. of compounding (payment) periods per year (m)4
Number of periods (mxn)40
Periodic rate (r/m)1.0%
Loan payment per period-$24,465.65

BGA will make Quarterly payment of $24,465.65for this loan.

1e.

Face value (FV or M)$100
Bond price (PV)-$117.00
Coupon rate5.6%
Number of years to maturity (n)8
Payment (CF, PMT or C)$6
Yield to Maturity (YTM or r)3.2%

The yield to maturity on the bonds is 3.2%.

1f.

Face value (FV or M)$1,000
Coupon rate7.0%
Number of years to maturity (n)6
Interest rate (r)4.1%
Payment (CF, PMT or C)$70
Bond value (PV)$1,151.53

The amount of each coupon payment is $1,151.53.

2. Risk Return and Estimates

Formulae for calculating the CAPM

E(Ri) = is the expected return on the capital asset.

Rf = is the risk free rate of interest arise from government bonds.

B=   expected asset rate of return.

(E(Rm) = it is the expected return of the market.

CAPM Estimates for Hypothetical company

= 0.024 +(-0.20) *(0.06-0.024)

= 0.024+(-0.20) *(0.036)

= 0.024+(-0.0072)

= 0.0168

CAPM Estimates for BGA company

= 0.024+(0.85) *(0.06-0.024)

= 0.024+(0.85) *(0.036)

= 0.024+(0.0306)

= 0.02706

(Morning Star, 2019)

B)

Expected return of portfolio= W1R1+W2R2

= 0.5*0.0168+ 0.5*0.02706

= 0.02193

= 2.193%

Beta of portfolio= 0.5*-0.20+ 0.5*0.85

= 0.325

3. Risk and return analysis

Drawing on expectations is a complicated process and wide to understand. At the same time, every business is keen to reap the maximum over its investment. In current business environment, it is high degree of risks and competition in the market.

Therefore, it is important to understand the risk associated with the business and its analysis (Tomasic and Xiong, 2017). In context to, BGA company, it is engaged in receiving, processing, manufacturing, distributing dairy other associated products.

In addition to this, its other divisions are involved in development and supply of bionutrient products and deliver to health and nutrition market. BGA is high-quality packer of cheddar and cheese products.

Apart from that, sales of Bega cheese are 1013 Million AUD in 2018 in Australia and in other regions is 424.87 Million AID. It shows that company has big market share in Australia and continuously growing international market as well.

It exports over $100 Million in last 12 months and it face less risks in its business as compare to its competitors. In relation to this, after reviewing the last data company performances. (Smith et al., 2014) it can be sated that its return on equity has varied in last years.

If the past data reviewed then, it reflects that in 2010-2011 it has generated 11.33 %c return on stakeholder equity that seems not so high return as expected. It might be due to most similar brands in the dairy sector. However, it further dropped by big sum of 2.29% with the discrepancy of 20.2%. Later, it rose up by 10.01%

In addition to this, tax return is other important aspect of which business need to be take care.

Tax return. In context to Bega cheese it returns on assets increased over the past few years Also, company has earned 7.42 % return on investment. It means that company’s rate of assets has increased by sum of 0.45% which is simply change of around 6.5%. (Da et al., 2012)

However, it was huge growth but reflected as better number from last 12 month figures. Similarly, Gross net income border and return on capital employed (ROCE) plays an important role in measuring the risk and in activity of risk of analysis.

Thus, it has been analysed that, risk is defined as difference between lowest and higher value of performance. In this manner, the difference between best returns and minimum returns is measured through various risks measures.

Apart from that investment must be mindful for every probable risks opportunities and hold the capability to recognise them and to prevent them proactivelyn (Beaulieu et al., 2013).

At the same time, Identifying and mitigating risks on time similarly important as measuring the level of risks. Moreover, despite of various research taken place on investment and risks measures. It is still questionable topic to measure the risk more specifically after the time of recession.

Furthermore, where investment has carried the risks by default because of nature of investment and market conditions. It can be measured by cash flows is not expectedly delivered.

Also such kind of investment consists the higher rate of risks in the market because of higher interest charges, premium etc. However, wherein interest rates are included in default premium that shows in the lender’s valuation of interest rate (Kocadagli, 2013).

Additionally, default risks managed interest rates presents the cost of dues for a particular business. There are various methods and tools for examining the risks involved in investment and market such as standard In context to above stated estimation of BGA and other hypothetical company beta rates has been applied for analysing the rate of return and risk (Minović and Živković, 2014).

At the same time, Beta is the most common and practiced method in order assess the risk involved in business varies from business to business and fluctuates depending on the stock volatility in the market time to time. it calculates the actual or projection based value of risk for a particular business against the stock market.

In the concept of Beta valuation, generally, there are three equations is defined. These equations state that if beta values is equals to 1, then it can be useful in order to gauge the risks for security.Additionally, if security beta is also equals to 1 then security price will go up with long run in market.

Similarity, if security with a beta is more than 1 it indicates that it is more volatile in comparison to market. On the other hand, if a security’s beta is less than 1, it indicates that the security is less volatile than the market.

For example, if a security’s beta is 1.5. In this theory, the security is 50 percent more volatile than the market. In this way, risk is calculated and analysed allied in an investment (Nhleko and Musingwini, 2016).

Moreover, there are a number of methods for measuring risks in business or investment against the market conditions and stock market volatility. At the same time, risks measuring methods differently applicable on different organisations unlike beta rate, risk rate and interest rate.

It also differs from business to business engaged in single or multiple investment portfolio and same risks opportunity and returns.

Thus, it can be stated that degree of risk and return rates depend on nature, amount invested and stock market conditions.

It is also identified that company dealings and investing decision impact on the share prices for a particular asset in single portfolio can either be positive or negative for each asset in each period of time. In order to measure the investment risks in large portfolio,

the finest way is to estimate the actual variance and return (Papavassiliou, 2013). In relation to this, CAPM method is most beneficial to give exposure to market risks and market beta. Apart from CAPM , AVM is also most common tool for correlating the invest capital with the possibility of rate of return and risk incur.

References

Beaulieu, M.C., Dufour, J.M. and Khalaf, L., 2013. Identification-robust estimation and testing of the zero-beta CAPM. Review of Economic Studies80(3), pp.892-924.

Da, Z., Guo, R.J. and Jagannathan, R., 2012. CAPM for estimating the cost of equity capital: Interpreting the empirical evidence. Journal of Financial Economics103(1), pp.204-220.

Kocadagli, O., 2013. A novel nonlinear programming approach for estimating CAPM beta of an asset using fuzzy regression. Expert Systems with Applications40(3), pp.858-865.

Minović, J. and Živković, B., 2014. CAPM augmented with liquidity and size premium in the Croatian stock market. Economic research-Ekonomska istraživanja27(1), pp.191-206.

Morning Star, 2019. Bega CheeseLimited. [Online]: Available at:https://mail.google.com/mail/u/0/#inbox/FMfcgxwCgLqFSdrPlbBTKJwXrJdMgKsz ( accessed on : 20th, April, 2019)

Nhleko, A.S. and Musingwini, C., 2016. Estimating cost of equity in project discount rates using the capital asset pricing model and Gordon’s wealth growth model. International Journal of Mining, Reclamation and Environment30(5), pp.390-404.

Papavassiliou, V.G., 2013. A new method for estimating liquidity risk: Insights from a liquidity-adjusted CAPM framework. Journal of International Financial Markets, Institutions and Money24, pp.184-197.

Smith, C., Wang, E., Zhao, Z., Goodman, N., De Silva, K., Toze, S., Hall, M., Sellahewa, J., Muster, T.H., Sanguansri, P. and Hodgers, L., 2014. Managing the Long Term Impact of Water Recycling on Irrigated Dairy Farms: The Bega Cheese Case Study.

Tomasic, R. and Xiong, P., 2017. Mapping the legal landscape: Chinese state-owned companies in Australia. Victoria U. Wellington L. Rev.48, p.323.

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