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Key Topics
Requirement
1- Write a report on "Managerial Finance".
Solution
Introduction
The time value of money is an important aspect that helps to determine the presence or the future value to make any investment. This is a very conventional concept that is used by firms to reach a particular decision about investment and other aspects. It helps to determine the correct decision regarding investment and other aspects. This will be explained in the first part with the use of present value, future value, an annuity. Under the second part of this paper, the aspects of common stockwill be explained. Third [art will include the bond valuation given a particular case study of James John.
Analysis
Part 1: Time Value of Money
A. Present Value (PV) of a lump sum
This has been examined taking the real-life example of taking a loan. The interest rate has been fixed as 10%. This is being used as per the assumption that banks will provide a loan at this prevailing rate. Again, the period that has been accounted for is 5 years. This means that the loan needs to be repaid in five years. The future value of the loan amount after five years is taken as 500000. The present value would be 310460. This means that to avail the loan which has a future value of 500000 needs to be 310460 while taking the loan (Faisalet al. 2018).
B. Future Value (FV) of a lump sum
The future value is being assessed based on the investment need tube done for personal use. The present value is being taken as 500000 and the number of periods for which investors need to be made is 5 years. The future value would be 310460.66 based on the calculation. The interest rate for the investment was fixed at 10%. This means at the end of each year there would be a 10% return on the investment made. Therefore, the FV will be 310460.66.
C. Present Value (PV) of an annuity
PV of annuity calculates the present value all the revenue raised by the investment in the future. The time value of money is an important aspect of its calculation. This is calculated for the coupon payments (Grant, 2016). Under the calculation periodic payment for, the coupon is fixed at -10000. Rate of interest is fixed at 10 percent and a number of periods (n) is 5 years. The payment needs to do at the end of each year. The PV of an annuity is determined as 37907.86769. this means that there needs to be payment of 37907.86769in each year for the full coupon payment.
D. Future Value (FV) of an annuity
The FV of an annuity is being calculated on the basis of the return that will get on the investment after completion of five years. The annuity amount that will be received at the end of each year is being assessed as 10000. This means that after the completion of the 5 years the return in the investment would be 2637.974808. this means that each payment which will be received at the end of each year will be invested at the rate of 10%. [Referred to excel sheet 1]
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Part 2: Common Stock Valuation
The model that has been used in order to determine the common stock price is the CAPM model. This helps to determine the stock prices with large investors. It used to eliminate the unsystematic risk out of the evaluation. The price-earnings ratio has been used in the calculation to reach the stock price determination. This best over the DDM model which is not easy to use and has risks too. It is an important tool for investment appraisal. There are risks involved but they are systematic risks that could be eliminated by the company after taking proper measures (Klychovaet al. 2015).
This has been analysed for the Woolworth company based in Australia. It operates in the retail industry and has a proper grip over the market also.the data has been extracted from the annual report if the company which as all the relevant information. There has been an assumption that recent changes in the transactions are not considered by the company (Sussman, 2019).
The stock of the company has been assessed based on several aspects. The dividend, earning per share, stick price is certain things that have used in the calculation. This is because the P/E ratio that has been calculated for the company shows the ratio 25.02. dividends issued by the company in the stocks is 0.92. investors have to pay 33.23 to buy each stock of the company. According to the DMM model, the dividend growth rate is -12.50percent. The value of the stock is 5.638148. under the CAPM model the price if the stock has been assessed as 2.24 percent. this means that there is anundervaluation of the stock by -27.59 percent. the stocks are undervalued according to their prices in the market. This is because the current stock price of the company is 33.23 and the value of the stick is determined as 5.63 which is less in comparison to the current price. (Woolworthsgroup, 2019) [Referred to excel sheet 2]
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A. The key features of the corporate bond are:
• The bonds issued by the organization of the JamesJohnsonneedto be authorized by the articles
• The par value for the bonds needs tube lowest price under which it could be sold.
• It needs to be in multiples of $1000 and $5000
• The fund raised is used for many purposes by the organizations. The activities could be fulfilling building requirements or purchasing equipment to expand the business. -
B. Call provision refers to a clause that allows the issuer the right to buyback or calls the entire shares issued or the part of the shares before the completion of the maturity period. Sinking fund provisions is available in some bind indentures which provide an obligation to the issuer to keep the provision in order to pay the bondholders at the end of the maturity period (Bauman,McFadden& Jablonski, 2018). This used to make the bond less risky with their compensating features.
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C. The value of the assets is being determined on the basis ofpresent value calculations. This present value of the assets of its expected cash flows in the future is the required asset value based on the future cash flows. It represents the value of the asset says for investment which could be determined with the help of the present value assessment.
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D. Bond is classified as a specific pattern of cash flow. There is steam of continuous cash payment and par value is also returned after completion of maturity. The annual payment for the coupon is the cash flow which is determined as coupon rate = pmt* par value =0.1*1000 =$100[Referred to excel sheet 3]
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E. The value of the bond just after it is issued is $837.2126957. this has been achieved by changing the value of r or i equal to 13 percent from 10 percent. the change in the r percentage could simply determine the value. Under given situations when the price of the coupon rate raised over the coupon rate, the value of the falls below the par value. Therefore, the selling price of the bond would be based on the discount.
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F. The YTM equates the binds present value. It is rate of return that is promised on bond. The YTM would be 10.7 percent. Several interest rates are fixed until the rate is found which produces equity by the trial and error method. This is said to be tiresome and the product would not be exact until the YTM needs to be a whole number (Mayo, 2017). The relationship that could be determined is YTM needs a tube above percent coupon rate. This is because the bonds are sold at the discount rate and discount bonds have (r>) coupon rate.
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G. After the liquidation, a company has not that much cash to pay for the principal payments and scheduled interest. A decision needs to be passed whether to dissolve the firm or to give permission on recognize. The bondholders could not expect to receive thereall promised payables. Firm assets need to be alive more than the dead. Under the liquidation, if a company is too far to be saved, it could be liquidized (Delas, Nosova&Yafinovych, 2015).
Conclusion
Thus, it is learned that the time value of money is an important concept in order to determine the future or present value. This could be a payment or a receipt. Bonds need to be issued on the basis of the promised payment. Under the liquidation of the company, there is not a compulsory payment to the bondholders. The CAPM model is an important aspect of determining the price of the common stock.
Reference list
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Book
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Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. US: John Wiley & Sons.Retrieved on 15.06.2019, from: https://s3.amazonaws.com/academia.edu.documents/43126581/Granrtaaa.pdf?response-content-disposition=inline%3B%20filename%3DContemporary_Strategy_Analysis_Concepts.pdf&X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Credential=AKIAIWOWYYGZ2Y53UL3A%2F20190629%2Fus-east-1%2Fs3%2Faws4_request&X-Amz-Date=20190629T102725Z&X-Amz-Expires=3600&X-Amz-SignedHeaders=host&X-Amz-Signature=79ddd2f957229363580bd6f14952eaa158aba6a8ba3e03a635272d40e82a372f
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Journals
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Bauman, A., McFadden, D. T., & Jablonski, B. B. (2018). The financial performance implications of differential marketing strategies: Exploring farms that pursue local markets as a core competitive advantage. Agricultural and Resource Economics Review, 47(3), 477-504.Retrieved on 15.06.2019, from:https://www.cambridge.org/core/services/aop-cambridge-core/content/view/66E6D8AC2B1322D0A7FAE855058A871C/S106828051700034Xa.pdf/financial_performance_implications_of_differential_marketing_strategies_exploring_farms_that_pursue_local_markets_as_a_core_competitive_advantage.pdf
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Delas, V., Nosova, E., &Yafinovych, O. (2015). Financial security of enterprises. Procedia Economics and Finance, 27, 248-266.Retrieved on 20.06.2019, from:https://pdf.sciencedirectassets.com/282136/1-s2.0-S2212567115X00104/1-s2.0-S2212567115009983/main.pdf?x-amz-security- ient
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Faisal, K. A. A., Khan, A. K., & Al-Aboud, O. A. (2018). Study of Managerial Decision Making Linked to Operating and Financial Leverage. International Journal of Accounting and Finance Research, 7(1), 139-143. Retrieved on 14.06.2019, from: https://www.researchgate.net/profile/Ahmad_Khan71/publication/321496218_Study_of_Managerial_Decision_Making_Linked_to_Operating_and_Financial_Leverage/links/5a2cef77a6fdccfbbf8763f7/Study-of-Managerial-Decision-Making-Linked-to-Operating-and-Financial-Leverage.pdf
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Klychova, G. S., Zakirova, A. R., Zakirov, Z. R., &Valieva, G. R. (2015). Management aspects of production cost accounting in horse breeding. Asian Social Science, 11(11), 308.Retrieved on 14.06.2019, from: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.1031.2518&rep=rep1&type=pdf
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Mayo, W. (2017). GAAP: An Analytical Study of Financial Accounting Standards (Doctoral dissertation, University of Mississippi).Retrieved on 19.06.2019, from:http://thesis.honors.olemiss.edu/821/1/THESIS%20FINAL.pdf
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Sussman, S. (2019). Prime Predator: Amazon and the Rational of Below Average Variable Cost Pricing Strategies Among Negative-Cash Flow Firms. Journal of Antitrust Enforcement.Retrieved on 14.06.2019, from:https://watermark.silverchair.com/jnz002.pdf?token=AQECAHi208BE49Ooan9kkhW_Ercy7Dm3ZL_9sWh8vLWJ6zNcbqngzvjmMyecplZtZcZ-9hcviATy1uwLChfv0ElVRr5O7pA-N-Z7AE-urNHFVLpzw6dZHivUj38scuxBs0SvkQZdWcyHPS0
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Website
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Woolworthsgroup, (2019), annual report, Retrieved on21.06.2019, from:https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf
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