Charles Sturt University/M.

Bus Program

FIN 516- Corperate Finance

FIN 516 -CORPORATE FINANCE

ASSINGMENT 1

Answer 1:
Solution:
1. What should be the goal of the financial manager of a corporation? Why
The goal of the financial manager of a corporation must be with three as following
i. Capital Budgeting: The processof planning and managing a firm's long-term investment is called capatital budgeting.
In capital budgeting, the financial manager tries to identify investment opportunities that are worth more to the firm than they
cost to acquire and they must be concerned with not only how much cash they
expect to receive, but also with when they expect to receive it and how likely they are to reciev it. Evaluating the size,
timing, and risk of future cash flows is the essence of capital budgeting.
ii. Capital Structure: A firm's capital structure refers to the specific mixture of long term debt and equity the firm use to
finance its operations. The financial manager has two concerns in this area. First, how much should the firm borrow, that is,
what mixture of debtand equity is best? The mixture chosen will affect both the risk and value of the firm. Second, what are
the least expensive sources of funds for the firm?
In addition to deciding on the financing mix, the financial manager has to decide exactly how and where to raise the money.
The expenses associated with raising long-term financing can be consderable, so different possibilities must be carefully
evaluated. Also, corporations borrow money from a variey of lenders in a number of different, and sometimes exotic, ways.

iii. Working Capital Managerment: is refers to a firm's short term assets, such as inventory, and its short-tem liabilities,
such as money owed to suppliers. Managing the firm's working capital is a day to day activity that ensure the firm has
sufficient resources to contineu its operations and avoid costly interruptions. This involves a number of activities all related to
the firm's receipt and disbursement of cash.

Answer 2:
Solution:
My opinion, I think that agency problems arise in corporation because:
+ Sole proprietorships: is a business owned by one person. This is the simplest type of business to start and is the
least regulated form of organization. The owner of a sole proprietorship keeps all the profits and there is no distinction
between personall and business income, so all business income is taxed as personal income.
+ Corporation: A coporation is a legal "person"separate and distinct from its owners, and it has many of the rights,
duties, and privileges of an actual person. Starting a corporation is somewhat more complicated than starting the other
forms of business organization, but not greatly so for a small business. Forming a corporation involvs preparing articles
of incorporation and a set of bylaws. The aticles of incorporation must contain a numbmer of things, including the
corporation's name, its intended life, its business purpose, and the number of shares that can be issued.
In a large corporation, the stockholders and the managers are usally separate groups. The stockholders elect the board

Assignment 1

Charles Sturt University/M.Bus Program

FIN 516- Corperate Finance

of directors, who then selec the managers. Management is charged with running the corporation's affairs in the
stockholder's interest.

Answer 3:
Solution:
Compute the variance of returns for the market.
The expected return is the individual expectation of stock which will earn over the next period. And the expectation
can be lower or higher that the actual earning.

Compute the covariance between Green's Apparels and the market

The covariance is a statistic measuring between two security stocks

Market
State of economy
(1)

Probability that
state occurs (2)

Green's apparel return

Rate of return if
Rate of return if
Product: (2) x (3) =
this demand
this demand
(4)
occurs (3)
occurs (5)

Product (2) x (5) = (6)

Stagnant

0.20

(10%)

(2%)

(15%)

(3%)

Slow growth

0.35

10%

3.5%

15%

5.25%

Average growth

0.30

15%

4.5%

25%

7.5%

Rapid growth

0.15

25%

3.75%

35%

5.25%

1.00

K= 9.75%

K=15%

Market Standard Deviation

Deviation = Ki K.(hat)
(1)

Deviation
(2)

(Ki K.

)P

-10 - 9.75 = -19.75

10 - 9.75 = 0.25
15 - 9.75 = 5.25
25 9.75 = 15.25

390.06
0.06
27.56
232.56

(390.06)(0.20)= 78.013
(0.06)(0.35)= 0.022
(27.56)(0.30)= 8.269
(232.56)(0.15)= 34.884

(3)

Variance = Q2 = 121.188
Standard deviation = Q = Q2 = 121.188 = 11.008%

Assignment 1

Charles Sturt University/M.Bus Program

FIN 516- Corperate Finance

Greens Apparels Standard Deviation

Deviation = K K.(hat)
(1)

(Deviationi)
(2)

(Ki K.hat) P

-15 - 15 = -30
15 - 15 = 0
25 - 15 = 10
35 15 = 20

900.00
0
100.00
400.00

(900.00)(0.20)= 180.00
(0.00)(0.35)= 0.000
(100.00)(0.30)= 30.00
(400.00)(0.15)= 60.00

(3)

Variance = Q = 270.00
Standard deviation = Q = Q2 = 270 = 16.43%

Compute Covariance of Green's Apparels and market

Cov (KA, KB)=QAB=Expected Value of [(Ki-K.(hat) of market) x (Ki - K.(hat) of greens apparels)]

State of the market

Deviationi = Ki
K.(hat)
Market(1)

Deviationi = Ki
K.(hat)
Greens
Apparels (2)

Probability (3)

Covariance
(1) x (2) x (3)

Stagnant

-19.75

-30.00

0.20

118.50

Slow growth

0.25

0.35

Average growth

5.25

10

0.30

15.75

Rapid growth

15.25

20

0.15

45.75

covariance between Market and Green's Apparels is

180.00
= 1.8%

Compute Beta of security of market

Variance of market is 121.188 or 1.21% and Covariance is 180 or 1.8%
Formula: Beta of security A = Cov (RA, RM) Q2 (RM)
A = 180 121.188 or (1.2 percent 1.8 percent)

A = 1.49

Can this number ever be negative?

Based on above calculation, the tow securies stock returns indicate a positive relationship because the number of
both returns are above their averages.
Otherwise, the numbers will negative if the return of one stock is above its average and another one return is below its
average.

Assignment 1

Charles Sturt University/M.Bus Program

FIN 516- Corperate Finance

Answer 4:
Solution:
Calculate price of the bond be at the end of five years from now
If the yield to maturity (YTM) on the bond remains unchanged, what will the price of the bond be at the end of five
years from now?
The face value of bond F is $ 1,000 with no rate of interest
A zero coupon bond for $214.55 with a face value of maturing in twenty years. So the interest rate of a zero coupon is

$1,000/$214.55= 4.661 = 8% in twenty years

The general formula for an investment over many periods can be written as
Future Value of an Investment: FV = C0 x (1 +r)T
The growth in the five year

FV = $214.55 x (1+ 0.08) 5 = $214.55 x 1.47 = $315.24

The price of the bond at he end of five years FV = 315.24

$315.24

Time

-$214.55

Answer 5: (in assighment 3 answer 1)

Answer 6:
Solution:
Calculate the following ratios for Diamond Drillers, Inc, and evaluate its position relative to industry average
Debt-to equity ratio = Total debt/Total equity
= 46.5/70.5
= 0.659
Interest coverage ratio = Earnings before interst and taxed / Interest expense
= 9/2
= 4.5
Industry averages = 7.30
Interest coverage is directly connected to the ability of the firm to pay interest. The comparison between the firm of 4.5 and
industry average 7.30 show the lower ration that company can not able to pay debt service.
Current ratio = Total current asset/ Total current liabilities

= 41/20.5 = 2 times

Assignment 1

Charles Sturt University/M.Bus Program

FIN 516- Corperate Finance

2.85 times

Industry averages =

A firm is having 0.85 times lower than average industry, that means the firm faces some difficulty to paym its bill of
account payable on time or it may need to extend to extend its bank credit. If current liabilities are rising faster than current
assets, the current ratio will fall, and this could face the financial troubles.
Inventory turnover = Cost of goods sold/ Inventory (average) = 45/18 = 2.5 times

Industry averages = 2.45 times

The industry average is lower than firm ration of 2.5 times. It indicates that the firm holding a good inventory.
Excess inventory is productive, and it represents an investment with a high rate of return.
Accounts receivable turnover = Net Credit Sales/ Average Account Receivable

= 45/14 = 3.21
($45 = 75% of net sale $60m)
Industry averages = 4.69
Diamond Drillers receivable turnover of 3.21 is lower than the industry average of 4.69. The actual value of this ration reflects
the firm's credit policy. This suggests that Diamond Drillers should have a liberal credit policy, so the amount of its
receivables will be higher than this.

Answer 7:
Solution:
a. i. Compute the present value of this series if the first cash flow occurs:
* The present value of today
Formula for Present Value of Annuity:
PV = C [1 r 1 r (1+r)9]

This series if the first cash flow occurs, so it starts in the first

10

PV = C [1 r 1 r (1+r)9] = $100 [1/0.06 1/0.06 (1+0.06)9] = $100 x 6.8017= $680.17

(6.8017 is 6% in 9 periods in table of present value of an Annuity)

So, the present of today or date 0 = PN9 + C = $680.17 + $100 = $780.17

Assignment 1

Charles Sturt University/M.Bus Program

FIN 516- Corperate Finance

* Present Value of one year from today

PV = C [1 r 1 r (1+r)10] = $100[1/0.06 1/0.06 (1+0.06)10]

= $100 x 7.3601= $736.01

(736.01 is 6% in 10 periods in table of present value of an Annuity)
Present Value of is $736.01

* Present Value of four year from today

PV = C [1 r 1 r (1+r)10] = $100[1/0.06 1/0.06 (1+0.06)10]

= $100 x 7.3601= $736.01

(736.01 is 6% in 10 periods in table of present value of an Annuity)
Discount the present value at year 3 back to present value ate date 0.
Present Value of date 0 = $736.01/(1.06)3 = 617.97
Present Value is $617.97

a. ii . Compute the present value of a series of 10 annual cash flow of $100 with effective interest rate 6%.
Compute the value of this series 15 years from today if the cash flow occurs:
Formula: FVAn (Annuity due) = PMT (FVIFi,n) (1+i)

- FVIFi,n is future value interest factor for i and n

* one year from today (21.015 interest rate in table A.4)
FVAn (Annuity due) = PMT (FVIF6%,14) (1+i) = $100 ( 21.015) (1.06) = $2227.60
* First cash flow occurs five years from today: (13.181interest rate in table A.4)
FVAn (Annuity due) = PMT (FVIF6%,10) (1+i) = $100 ( 13.181) (1.06) = $1397.16
* First cash flow occurs six years from today: (11.491interest rate in table A.4)
FVAn (Annuity due) = PMT (FVIF6%,9) (1+i) = $100 ( 11.491) (1.06) = $1218.08

b. i. How much will your annual donation be if the first one is in one years time?
Perpetuity is a stream of equal payments expected to continue forever.
PV(perpetuity) = Payment/ Interest rate = PMT/i

So, the PMT is = PV x i = $15,000 x 0.07 = $1,050

The donation of first year is $1,050

b. ii. How much will your annual donation be if the first one is in four years time?
PMT of first year is $1,050 and the 1.2250 is future value in table A3

Assignment 1

Charles Sturt University/M.Bus Program

FIN 516- Corperate Finance

Answer 8:
Solution:
a. Draw a timline of these cash flows
Contract payments schedule

Detail

Amount

once-off

On 1 Jan 2009

1st year

$120,000.00

receive at the end of each quarter at $30,000

2nd year

$120,000.00

receive at the end of each quarter at $30,000

3rd year

$150,000.00

receive at the end of each quarter at $37,500

4th year

$150,000.00

receive at the end of each quarter at $37,500

5th year

$180,000.00

receive at the end of each quarter at $45,000

6th year
Bonus of the 6
years

$180,000.00

8
Total

$5,000.00

receive at the end of each quarter at $45,000

Probability 25% of $10,000/year for 6 years. Receive at the end
$15,000.00
of each year
$920,000.00

b. What is the value of the contract to you today if the effective interest rate is 12% pa?
* The pay off payment of signing cotrac t is $ 5,000
* The bonus of 6 year = $2,500 x 4.1114 (4.1114 is present value of interest rate of year 6 of 12%)

= $10,278.5
* The salary in the first 2 years in each quarter with 3% of the 12% of one year contract
= $30,000 (salary in a quarter) x 7.0197 (7.0197 is present value of interest rate of 8 quarter of 3%)

= $210,591

* The salary of next 2 years ( interest rate 3%)

1, PV at quarter 8 = $37,500 x 7.0197 = $263,238.75
2, PV0 = 263,238.75 x 0.7972 (TABLE A.1 of 2 years@12%)

= $ 209,853.93

* The salary of last 2 years ( interst rate 3%)

1, PV at quarter 16 = 45,000 x 7.0197 = 315,886.5
2, PV0 = 315,886.5 x 0.6355(TABLE A.1 of 4 years @12%)

= $200,745.87
= > The total value of contract today is
= $5,000 + $10,278.5 + $210,591 + $ 209,853.93 + $200,745.87 =

Assignment 1

$636,469.30

Charles Sturt University/M.Bus Program

FIN 516- Corperate Finance

c. Compute the size of the annual withdrawals if we wish to have $100,000 left in the account after 20 years

We have 30% saving at the beginning of year 7 after the contract period
= total contract value x 30% = $920,000 x 30% = $276,000

When 20 annual withdrawal start at the beginning of year seven, saving value at beginning of year 6
= 276,000 x 0.9434 (6 percent interest rate)
= $260,378.40

Since they want $100,000 to be left in the saving after the 20 annual withdrawals,
the value at beginning of year 6 should minus out that amount
Value of $100,000 at year 6 = 100,000 x 0.3118
= $31,180 (TABLE A.1 of 20 years at 6%)
PV at year 6 for the 20 annual withdrawals = 260,378.40 31,180 = $229,198.40

PV = C[1/R 1/(R(1+R)T)]
229,198.40 = C[1/0.06 1/(0.06(1+0.06)20)] = C x 11.4691
So the annual withdrawal (C) = 229,198.40 / 11.4691 = $19,984

i.

Assignment 1