KINDLY ANSWER THE QUESTIONS IN THE ATTACHED FILE.....

Assignment - Business Finance FINA 321 Instruction: a. Assignment should be uploaded on the UMS portal on or before 15th November 2015. b. Assignment in no case will be accepted after the last date of submission. c. The answer should be typed on word and the calculation based can be solved on excel and the same can be pasted on the word file. d. Only one file will be entertained for assignment (i.e. word file with solved excel sheet pasted in the same file. e. For the critical answering avoid plagiarized content as marks will be deducted for same. ___________________________________________________________________________ Section A - Objective Type Question (1x5=5) 1. If firm receives a cash flow from an investment that will increase by 10 percent annually for an infinite number of years. This cash flow stream is called a. an annuity due. b. a growing perpetuity. c. an ordinary annuity. d. a growing annuity. 2. Trevor Smith wants to have a million dollars at retirement, which is 15 years away. He already has $200,000 in an IRA earning 8 percent annually. How much does he need to save each year, beginning at the end of this year to reach his target? Assume he could earn 8 percent on any investment he makes. (Round to the nearest dollar.) a. $13,464 b. $14,273 c. $10,900 d. $16,110 3. If you were to compare the returns of an individual stock to a market index, select the answer below that is most true. a. The returns of the individual stock will show more variability than those of the market index. b. The returns of the individual stock will show less variability than those of the market index. c. The returns of the individual stock will show the same level of variability than those of the market index, if they have the same beta. d. None of the above. Page 1 of 4 4. A portfolio with a level of systematic risk the same as that of the market has a beta that is a. equal to zero. b. equal to one. c. less than the beta of the risk-free asset. d. less than zero. 5. Which one of the following statements is NOT true about common stock? a. Common-stock holders have the right to vote on the selection of the board of directors for the firm. b. Common stock is considered to have no fixed maturity. c. Owners of common stock are guaranteed dividend payments by the firm. d. Common-stock holders have limited liability. SECTION B Calculation based (5x2=10) Ques. 2 Ross wants to buy a car worth 50 000 by financing it over a period of 36 months. The bank offers Ross an interest rate of 20% per annum, compounded monthly. They also offer him a 6 month grace period.(I.e. Ross does not have to pay anything until 6 months have passed, however, interest will still be charged during the grace period, from the beginning of the finance contract. Assume an ordinary annuity is in effect where necessary.) Calculate his monthly installment. Ques. 3 Analysts following the Tomkovick Golf Company were given the following information for the years ended December 31st, 2014 and December 31st 2013: 2014 2013 Assets Cash and marketable securities $ 33,411 $ 16,566 Accounts receivable 260,205 318,768 Inventory 423,819 352,740 41,251 29,912 $ 758,686 $ 717,986 Plant and equipment 1,931,719 1,609,898 Less: Accumulated depreciation (419,044) (206,678) $1,512,675 $1,403,220 Other current assets Total current assets Net plant and equipment Page 2 of 4 Goodwill and other assets Total assets Liabilities and Stockholders' Equity Accounts payable and accruals 382,145 412,565 $2,653,506 $2,533,771 2014 2013 $ 378,236 $ 332,004 Notes payable 14,487 7,862 Accrued income taxes 21,125 16,815 $ 413,848 $ 356,681 679,981 793,515 $1,093,829 $1,150,196 __ __ 10,000 10,000 Additional paid-in capital 975,465 975,465 Retained earnings 587,546 398,110 Less: Treasury stock (13,334) __ $1,559,677 $1,383,575 $2,653,506 $2,533,771 Total current liabilities Long-term debt Total liabilities Preferred stock Common stock (10,000 shares) Total common equity Total liabilities and stockholders' equity In addition, it was reported that the company had a net income of $ 3,155,848 and that depreciation expenses were equal to $212,366 during 2014. a. Construct a 2014 cash flow statement for this firm. b. Calculate the net cash provided by operating activities. c. What is the net cash used in investing activities? d. Compute the net cash provided by financing activities. Page 3 of 4 Section C - Critical Thinking (4 x 2.5 = 10) Ques. 4 Explain what the standard deviation of returns is and why it is especially useful in finance, and calculate it for an asset. Ques. 5 Explain the concept of diversification. Ques. 6 Describe what the Capital Asset Pricing Model (CAPM) tells us and how to use it to evaluate whether the expected return of an asset is sufficient to compensate an investor for the risks associated with that asset. Ques. 7 Explain what the weighted average cost of capital for a firm is and why it is often used as a discount rate to evaluate projects. Page 4 of 4 1. b) growing perpetuity a)13464 A B B) It measures the volatility and thus the risk of return. The importance of standard deviation and the reason why it is useful is that it measures the component beta of a return which incorporates the total risk and the market volatility.it is also useful in the assessment of risk level in the portfolio with respect to a client tolerance and how a risky portfolio could be diversified. Portfolio diversification refers to the measures used by the investor to minimize the risk exposure by reducing the systematic risk in an asset portfolio. A well-diversified portfolio is achieved when the expected return is obtained at a minimum cost. The concept of risk diversification is important to an organization as it assist the financial manager to avoid future uncertainty about the business investment project. CAPM It refers to the model used to describe the relationship between risk and expected return in a portfolio risky asset. The Capital Asset Pricing Model (CAPM) specifies the relationship between risk and required rate of return on assets when they are held in well-diversified portfolios. The CAPM therefore states that in equilibrium, only the systematic (market) risk is priced, and not the total risk; investors do not require to be compensated for unique risk. The assumption includes Investors are rational and they choose among alternative portfolios on the basis of each portfolio's expected return and standard deviation. Investors are risk averse. Investors maximize the utility of end of period wealth. Thus CAPM is a single period model. Investors have homogeneous expectations with regard to asset return. Thus all investors will perceive the same efficient set. The CAPM is given as follows: Ri = Where RF + [E(RM - RF)] Ri is required return of security i RF is the risk free rate of return E(RM) is the expected market rate of return Note i is Beta. = Cov(im) m Where Cov (im) is the covariance between assets i and the market return. m is the variance of the market return. In CAPM, the investor is compensated in two categories based on the time value of money and the degree of risk which are incorporated in the CAPM formula. The time vale of money is measured using the risk free rate and compensate investors for their investment over a given period of time. The rest measures the risk component and the amount of compensation required by investor in taking the risk.it is illustrated by Beta that compares the returns of an asset in the market over a period to the market premium. The weighted average cost of capital for a firm (WACC) Weighted average cost of capital (WACC) It is the overall/composite cost of capital that a firm is currently using. It is calculated by determining the weighted average cost of each source of capital in the firm's capital structure. WACC(ko) = kd( D ) + kp ( P ) + kr ( R ) + ks ( S ) V V V V Where; kd, kp, kr, ks =percentage cost of debt, preference share capital, retained earnings and external equity respectively It is used by investors to determine whether to invest or not 2. $50000 N=36 months =3yrs Interest rate =20% compounded monthly Monthly instalment is given by finding the PVAF 50000,36,20%/12 1-(1+R)N/R PVAF =26.857 monh Tomkovick Golf Company Cash flow statement For the period ending 2014 Period Ending 31/12/2014 Net Income Operating Activities, Cash Flows Provided By or Used In 3,155,1 48.00 Depreciation notes payable accrued income tax accounts payable Changes In Accounts Receivables 212,3 66.00 6, 625.00 4, 310.00 46,2 32.00 58,0 63.00 Changes In Liabilities Changes In Inventories Changes In Other current asset Total Cash Flow From Operating Activities (71,0 79.00) (11,3 39.00) 3,400,3 26.00 Investing Activities, Cash Flows Provided By or Used In plant and equipment goodwill and other investment Other Cash flows from Investing Activities Total Cash Flows From Investing Activities (321,8 21.00) 30,4 20.00 (291,4 01.00) Financing Activities, Cash Flows Provided By or Used In Dividends Paid Purchase of Stock Net Borrowings notes payable Total Cash Flows From Financing Activities (975,4 65.00) (679,9 81.00) 6, 625.00 (1,648,8 21.00) - Change In Cash and Cash Equivalents 1,460,1 04.00 Running head: FINANCE QUESTION 1 Finance question Name Institution 1.b) growing perpetuity a)13464 A B B) 2. 2. Finance question 2 $50000 N=36 months =3yrs Interest rate =20% compounded monthly Monthly instalment is given by finding the PVAF 50000,36,20%/12 1-(1+R)N/R PVAF =26.857 month 3 Tomkovick Golf Company Cash flow statement For the period ending 2014 31/12/2014 Period Ending 3,155,1 Net Income 48.00 Operating Activities, Cash Flows Provided By or Used In 212,3 Depreciation 66.00 6, notes payable accrued income tax 625.00 4, Finance question 3 310.00 46,2 accounts payable 32.00 58,0 Changes In Accounts Receivables 63.00 Changes In Liabilities (71,0 Changes In Inventories 79.00) (11,3 Changes In Other current asset 39.00) 3,400,3 Total Cash Flow From Operating Activities 26.00 Investing Activities, Cash Flows Provided By or Used In (321,8 plant and equipment goodwill and other 21.00) 30,4 investment 20.00 Other Cash flows from Investing Activities (291,4 Total Cash Flows From Investing Activities 01.00) Financing Activities, Cash Flows Provided By or Used In Dividends Paid (975,4 Purchase of Stock 65.00) (679,9 Net Borrowings notes payable 81.00) 6, Finance question 4 625.00 (1,648,8 Total Cash Flows From Financing Activities 21.00) 1,460,1 Change In Cash and Cash Equivalents 04.00 4. It measures the volatility and thus the risk of return. The importance of standard deviation and the reason why it is useful is that it measures the component beta of a return which incorporates the total risk and the market volatility.it is also useful in the assessment of risk level in the portfolio with respect to a client tolerance and how a risky portfolio could be diversified. 5. Portfolio diversification refers to the measures used by the investor to minimize the risk exposure by reducing the systematic risk in an asset portfolio. A well-diversified portfolio is achieved when the expected return is obtained at a minimum cost. The concept of risk diversification is important to an organization as it assist the financial manager to avoid future uncertainty about the business investment project. 6. CAPM It refers to the model used to describe the relationship between risk and expected return in a risky portfolio asset. Finance question 5 It specifies the relationship between risk and required rate of return on assets when they are held in well-diversified portfolios. The assumption includes Investors are rational since they choose among alternative portfolios by each portfolio's expected return and standard deviation. Investors are risk averse. Investors can maximize the utility of end of period wealth. Investors have homogeneous expectations concerning asset return. The CAPM is given as follows: Ri = Where RF + [E(RM - RF)] Ri is required return of security i RF is the risk free rate of return E(RM) is the expected market rate of return Note i is Beta. = Cov(im) m Finance question Where 6 Cov (im) is the covariance between assets i and the market return. m is the variance of the market return. 7. Weighted average cost of capital is the measure of each of the component of finance used by investor to determine the appropriateness of the investment return. WACC(ko) = kd( D ) + kp ( P ) + kr ( R ) + ks ( S ) V V V V Where; kd, kp, kr, ks =percentage cost of debt, preference share capital, retained earnings and external equity respectively It is used by investors to determine whether to invest or not