Business Case

Business Case Assignment 1705522

Answer 1

a)

Payment per period (CF)$26,200
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)-$1,446,481.99

Myo will receive the amount of $1,446,481.99 from the bank.

b)

Present value (PV)$445million
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)10.1%
Future value (FV)-$720.26million

Annual operating revenue in 5 years for Myo will be $720.26 million.

c)

Effective Annual Rate (EAR)

Loan A
Stated annual rate (r)5.45%
No. of compounding periods per year (m)12
EAR5.59%

 

Loan B
Stated annual rate (r)5.50%
No. of compounding periods per year (m)2
EAR5.58%

 

Loan C
Stated annual rate (r)5.40%
No. of compounding periods per year (m)365
EAR5.55%

 

The company should choose the lowest EAR of the loan option so, EAR of loan C is the lowest i.e. 5.55% should be chosen. The consideration of this EAR will be cost effective for the company to reduce the loan cost due to paying low interest rate on the loan amount.

d)

Finding the payment required for an amortising loan
Loan principal (PV)$420,000
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-$12,670.25

The company will have to make Quarterly payment of -$12,670.25 on this loan.

e)

Face value (FV or M)$100
Bond price (PV)-$92.00
Coupon rate4.1%
Number of years to maturity (n)8
Payment (CF, PMT or C)$4
Yield to Maturity (YTM or r)5.4%

The yield to maturity on the bonds is 5.4%.

f)

Face value (FV or M)$1,000
Coupon rate7.0%
Number of years to maturity (n)6
Interest rate (r)4.8%
Payment (CF, PMT or C)$70
Bond value (PV)$1,112.38

The amount of each coupon payment is $1,112.38.

`Answer 2

  • CAPM Estimates for Hypothetical company

(Brown and Walter, 2013)

= 0.6+ (-0.20) +( 1.96-0.06)

=0.06+(-0.20) + 1.9

=0.04+1.9

=1.76

  • CAPM Estimates for MYO

= 0.6+ (1.41) +( 1.96-0.06)

=0.06+(1.41) +1.9

=1.47+1.9

=3.37

Answer 3

Risk and return analysis

Drawing on expectations is not an easy going process and vital concept to understand. At same time, when it comes to drawing on expectation it becomes more complex and dynamic phenomenon.

In this way, drawing is a skill and requires the knowledge, rules and regulation in order to draw the desired outcome from particular practice (Du et al., 2015) .Similarly, it is a risky process and various factors are involved in this process.

According to Theory of drawing, it does not present the realistic view of the world, it demands of certain course of cations. In this manner, these proposed action creates risks.

In context to MYO company the theory of drawing is fit apply as it could assist the business in every area of business. In regards to this, MYO is company produces medical devices specifically for people who suffer from neurological disorder (Dewandaru et al., 2015).

Herewith, this theory supports on the production part as well as the executing the marketing plan in order to reap the competitive advantage in this sector of business. On the other hand, it can easily convenient to identify the gaps of desired product and customer satisfaction. Also, to ascertain and prevent the probable gaps.

It is identified that risk is termed as the deviation between lowest and highest performance. In this way, the range between best returns and worst returns can be identified through certain measures.

In addition to this, investor must be aware of every possible risk opportunities and possess the ability to identify and take the preventive actions (Ortas and Moneva, 2015). At the same time, managing the risks and its analysis is equally important to measuring risks.

However, the accurate and authentic measures for evaluating risks in investment and its return is still a debatable topic specially after the recession crisis.

In addition to this, it can be stated that each investment in different portfolio presents the small part of portfolio. This is how, it increases or reduces the value of particular investment or group of investment and it impact on the portfolio investment is not in significant amount.

At the same time, the impact of company specific action 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( Aven, 2015).

In this way, large portfolio it is identified that positive and negative factors need to be average so that overall impact can risk factors cannot affect the total portfolio. In case of investment risks in portfolio, the best way to measure by examining the variance and actual return.

At the same time, in CAPM is a method that gives exposure to market risks by market beta. On the other hand, APM and other methods allow to assess the multiple resource and factors and calculation of an investment, its return measures and risk associated to each source of market (Zabarankin et al., 2014).

In addition to this, regression and proxy model for risks tools as per the organisation character and nature for an example size and capital that is correlated with the possibility of hire rate of return in the past and is used to measure the involved risk factors in market.

In the instance where investment is done with risk default in nature can be measured by the cash flows is not expectedly delivered. In addition to this, investment consist the higher rate of risk due to higher interest charges, premium.

Although wherein interest rates are included in default premium that shows in the lender’s valuation of interest rate. Additionally, default risks managed interest rates presents the cost of dues for a particular business.

Apart from that, there are certain methods for examining the risks involved in investment and market. Risk management is crucial process for organisation to make investments and involves identifying amount of risk involved and to makes efforts in this direction to mitigate risks.

By estimating and calculating standard deviation, beta, value at risk (VaR) and conditional value at risk (CVaR).

In the above mentioned estimation of CAPM in case of MYO and other hypothetical company bets is used for assessing the rate of return and risk. Beta is the most common measure of risks.

It estimates the value of systematic risks for an organisation relatively to whole stock market. In case market has beta equals to one then it can be used to gauge the risks for security (Chaibi et al., 2015)

.Additionally, if security beta is also equals to 1 then security price will go up with long run in market.  In this manner 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, suppose a security’s beta is 1.5.

In this theory, the security is 50 percent more volatile than the market. This is how it estimated and anticipates the risk involved in the investment (Buss and Vilkov, 2013).

Similarly, there are certain methods to calculate the rate of return for an investment depending on the interest rate and risk free rate and beta rate. It also varies from organisation to organisation having single and multiple business with similar risks and return types.

References

Aven, T., 2015. Risk analysis. John Wiley & Sons.

Brown, P. and Walter, T.S., 2013. The CAPM: Theoretical validity, empirical intractability and practical applications.

Buss, A. and Vilkov, G., 2012. Measuring equity risk with option-implied correlations. The Review of Financial Studies25(10), pp.3113-3140.

Chaibi, A., Alioui, S. and Xiao, B., 2015. On the impact of firm size on risk and return: Fresh evidence from the American stock market over the recent years. Journal of Applied Business Research31(1), p.29.

Chong, J. T., Jennings, W. P., & Phillips, G. M. (2012). Five Types of Risk and a Fistful of Dollars: Practical Risk Analysis for Investors. Journal of Financial Service Professionals66(3).

Dewandaru, G., Bacha, O.I., Masih, A.M.M. and Masih, R., 2015. Risk-return characteristics of Islamic equity indices: Multi-timescales analysis. Journal of Multinational Financial Management29, pp.115-138.

Du, T., Xiong, L., Xu, C.Y., Gippel, C.J., Guo, S. and Liu, P., 2015. Return period and risk analysis of nonstationary low-flow series under climate change. Journal of Hydrology527, pp.234-250.

Ortas, E. and Moneva, J.M., 2013. The Clean Techs equity indexes at stake: Risk and return dynamics analysis. Energy57, pp.259-269.

Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM) with drawdown measure. European Journal of Operational Research234(2), pp.508-517.

 

Leave a Comment