Financial Management (FIN2210)

FIN2210
Financial Management

Course code

: FIN2210

Section

: 81B1

Title

: Individual Assignment

Students name
Student I/D
Lectures name

: Sevin Alnovans
: I12001388
: MS. Norsyarmilla

Binti Mokhtar
Date of submission
2013

: 01st November

Financial Management (FIN2210)

1.

You are considering 3 investments. The first is a bond that is selling

in the market at RM1, 100. The bond has a RM1, 000 par values,
pays interest at 14 percent and is scheduled to mature in 12 years.
For bonds of this risk class, you believe that a 12 percent rate of
return should be required. The second investment that you are
analyzing is a preferred stock (RM100 par value) that sells for RM90
and pays annual dividend of RM12.Your required rate of return for
this stock is 14 percent. The last investment is a common stock
(RM25 par value) that recently paid a RM3 dividend. The firms
earnings per share have increased from RM4 to RM8 in 10 years,
which also reflects the expected growth in dividends per share for
the indefinite future. The stock is selling for RM28 and you think the
reasonable required rate of return for the stock is 20 percent.
a) Calculate the value of each security based on your required rate of
return.
b) Which investment(s) should you accept? Why?

A)

First Investment Bond

Market price = RM1,100

FV = RM 1,000
PMT = 140
N = 12
I/YR = 12%
PV = 1,123.89

Financial Management (FIN2210)

Second Investment Preferred Stock

Par value = RM 100
Market price = RM90
D = 12
Kps = 14
Vps=

D
Kps

12
0.14

85.71

Third Investment Common Stock

Market price = RM 28
Par Value

= RM 25

PV = 4
FV= 8
Do= 3
R = 20%
N = 10 years
g = 7.18%
D1= Do(1+g)

Financial Management (FIN2210)

= 3(1+0.0718) = 3.2154
D1

Vcs = rg
3.2154

= 0.20.0718
=

3.2154
0.1282

= 25.08
B) The firm should not accept the second and third investment due to the market price is
higher than the bond value which can lead the firm hard to make profit. However, the
firm should take the first investment due to the bond values is higher than the market
price which can make profit better that second and third investment.

Financial Management (FIN2210)

2. There are several groups of people, who are interested in obtaining the financial
statements, basically for decision making purposes. You are to LIST example of the
users and the REASON they are interested in the financial statements.

Owners are commonly the most interested user of financial statements. Owners have
an interest in the amount of money they retain for personal income, but also in profits.
This information derived from the income statement. Owners want to know how
much capital the business consumed in order to generate sales revenue.

Investors are people that invest their money in certain business with evaluating the
risk in and expected dividends provided by their investment. Investor need financial
information to determine whether to invest or disinvest in the business and also need
to determine whether they should buy, sell, or hold. Information which enables
investors to assess the ability to enterprise to pay dividends was also interested by
them. Furthermore, risks associated with the investment may be gauged from the
Financial Statements. For instance, fluctuating profits indicate higher risk. Therefore,
Financial Statements provide a basis for the investment decisions of potential
investors.

Lenders usually referred to as loan creditor group such as bank. They are interested in
information to determine whether to lend money to entity and assess whether loans
and interests attaching them will be paid upon maturity.

Employees have an interest in financial statements because they need assurances for
job retention. Employees can also have an interest in their company's stock price,
which has a close relationship to the company's accounting information. Employee
stock options may increase or decrease precipitously based on the company's financial
health. Employees need this information to determine if they should buy more or hold
their current investment level.

Financial Management (FIN2210)

Government and their agencies use accounting information for a number of purposes
the most obvious of which is the levying of taxes. For this purpose it needs to know
how much profit has been made. This information is provided in the profit and loss
account. The government also uses accounting information to produce industry
statistics for the purposes of regulation etc.

Customers interested in information about continuance of an enterprise that can

supply them with goods. For example, if you are assembling cars you need to ensure
that the suppliers of your brakes are not going to go bankrupt. The importance of this
has increased with the introduction of techniques such as just-in-time management.
The customers in this situation will need to see that the enterprise is profitable, that it
owns enough to pay what it owed and that it is likely to remain in business and supply
components efficiently and on time. Some of these needs are met at least partially by
the profit and loss account and the balance sheet.

The public may wish to assess the effect of the company on the economy, local
environment and local community. Companies may contribute to their local economy
and community through providing employment and business for local suppliers. Some
companies also run corporate responsibility programmes through which they support
the environment, economy and community by, for example supporting recycling
schemes.

Suppliers use financial information to decide whether to sell goods to an entity and
assess the likelihood of being paid when due. By using financial information in
various business decisions, suppliers ensure data accuracy and serve as an extra layer
of monitoring in regulators' financial transparency schemes.

Creditor uses its financial statements in various ways to review and assess the
business. By ascertaining that its financial statements are accurate, a business can
prepare useful information to support expedite credit decisions. Each financial
statement provides a creditor with a different set of data with which to make a
decision about extending credit or to evaluate the credit-worthiness of an existing
customer.

Financial Management (FIN2210)

Management is interested to analyze the financial statement for measuring

the effectiveness of its policies and decisions. It analyze the financial statements to
know short term and long term solvency position, profitability, liquidity position and
return on investment from the business.

3.

You are required to prepare a LOAN AMORTIZATION SCHEDULEfor a

5% personal loan
Amounting RM5,000 over 5 years. What would be the equal annual end-ofyear payments?
N
I/YR
PV
PMT
FV

:
:
:
:
:

5 years
5%
5,000
? 1,154.87
0

Year

Annuity

Interest
Portion of
The Annuity

0
1
2
3
4
5

0
1,154.87
1,154.87
1,154.87
1,154.87
1,154.87

0
250
204.76
157.25
107.37
55.00

Repayment
of The
Principal
Portion of
The Annuity
0
904.87
950.11
997.62
1,047.50
1,099.87

Outstanding
Loan
Balance
After The
Annuity
Payment
5,000
4,095.13
3,145.02
2,147.40
1,099.90
0.030