Business Finance (Essay Sample)

Business Finance
[Author’s Name]
[Institution’s Name]
Part-A
1.
 

Security A

Security B

Expected Return

12

12

Standard Deviation

20.9

10.1

Beta

0.8

0.2

If we are an risk averse investor, then Security B would be more beneficial for us as compared to Security A, as it has the same amount of return, but less riskier than that of Security A, with low Beta and Standard Deviation
2.
 

1

2

3

4

5

Sales

400

400

400

400

400

Cost

150

150

150

150

150

Gross Profit

250

250

250

250

250

Tax

75

75

75

75

75

Net Income After Tax

175

175

175

175

175

Add Back Depreciation

200

200

200

200

200

Cash Flow

375

375

375

375

375

Year

 

Discounting Factor

Discounted Cash Flow

0

-1200

 

 

1

375

0.909

340.91

2

375

0.826

309.92

3

375

0.751

281.74

4

375

0.683

256.13

5

375

0.621

232.85

SUM

 

 

1,421.55

NPV

 

 

250

The answer is a. 250$
3.
Both A and B is right
4.
II, III and IV are the one which are known as non diversifiable risk
5
FV = 10,000
Parents already deposit = $ 5,000
Hence
PV = 5,000 / (1 + 10%) ^3
= 3,757 $
Hence (A) is right
6)
Net Present Value (D)
7)
Year

Cash Flow Project A

Cash Flow Project B

Discounting Factor

Discounted Cash Flow Project A

Discounted Cash Flow Project B

0

(1,495.00)

(6,704.00)

 

 

 

1

500

2,000

0.909

454.545

1,818.18

2

500

2,000

0.826

413.223

1,652.89

3

500

2,000

0.751

375.657

1,502.63

4

500

2,000

0.683

341.507

1,366.03

5

500

2,000

0.621

310.461

1,241.84

SUM

 

 

 

1,895.393

7,581.574

NPV

 

 

 

400.39

877.57

Hence, it is a mutually exclusive projects, hence Project 2should be selected, therefore, it should be selected.
8)
= 800 / 0.14
* 140,000
9)
Year

Accounting Profit

Cash Flow

1

799

4,000

2

799

4,000

3

799

4,000

4

799

4,000

Initial Outlay

 

12,106

Sum

3,196

16,000

Accounting Rate of Return

15

 

Payback period is 1 year
10)
2.15 / 12.5% – 4%
= 25.29 $
= 25.29 * (1+4%)^3
= $ 28.47 (B)
Part-B: Essay Writing
The Significance of Beta
Standard Deviation and Risk are two important aspects from the viewpoint of an investor as both of these measures are used to assess the level of risk from an investment. In finance standard deviation is the amount which is deviated from the mean of a company (Helen Meek, 2012). It is one of the most traditional and effective way in terms of analyzing the association of risk. Securities which are having low standard deviation, shows that the security has a lower chance of increasing the risk and it is certainly effective for the investors which are risk averse (Jim Blyth, 2005). Usually Standard Deviation is a term which used in the literature of statistics and it is quite effective in terms of analyzing the riskiness in a security. Apart from Standard Deviation, Beta is yet another important risk measurement tool which used to assess the level of risk in a security. Beta is a tool which is used to assess the level of diversifiable risk. It is also used to compare the risk association of one index with the other and then analyze its effectiveness in particular (Kumar, 2009).
In the field of investment, the essence of risk and return are extremely important and both of these things are quite valuable in particular. Risk is the name of happening of any unprecedented and unexpected event in particular and it should be decrease accordingly for the sake of prosperity. For a security and even for a company, the association of risk is an extremely important vision which has been used for different purpose (Kumar, 2009). An individual always concerned about the level and quantity of risk in the investment more than the actual return of the security. There are two types of risks, which are diversifiable risk and non diversifiable risk and both of the kinds of risks are important for the sake of an organization and for individual investor as well (Parry, 2005). The field of investment is extremely big and vast and there are number of things are associating with the same. Standard Deviation and Beta at one end are quite important for the utilization of risk and mitigation of risk as well, but there are some other things as well, which are essential for the same thing which is Value at Risk (VAR), one of the greatest tool used for the same purpose.
There are certain tools which could be use to mitigate and manage the level of diversifiable risk accordingly and among them, the name of Standard Deviation and Beta are some of them, which are quite important and particular. The importance of both of these tools are effective for an investor in particular as it has the ability to analyze the level of risk from the investment and both of these tools have been used in different parts of the world merely for the same reason in particular. The security would have been analyzed effectively with the help of these tools and a risk averse investor should used the same for the purpose of mitigating risk. If a researcher is trying to examine the riskiness in a project, then they have to apply the rules and regulations of the standard deviation and beta which are now become integral methods to assess the level of risks accordingly. It has been consensus in number of ways that the provision of these methods are more than important for the sake of riskiness of security in particular and by applying effective strategies, effectiveness could have been found accordingly and effectively. There are certain aspects which deem extremely important for the researcher to analyze the level of risk with a security and all of such measures are more than important to analyze in particular.
Part-C: Case Study
We like to measure the annual Cash Flow through the NPV and other important measures and computation is mentioned below
Year

1

2

3

4

5

Sales

21,000,000

36,000,000

42,000,000

24,000,000

15,600,000

Variable Cost

12,600,000

21,600,000

25,200,000

14,400,000

10,800,000

 

 

 

 

 

 

Contribution Margin

8,400,000

14,400,000

16,800,000

9,600,000

4,800,000

Fixed Cost