Finance Assignment: Resolving Financial Affairs Of Businesses

Question

Task: The present finance assignment is based on the following case studies:
Case Study 1
Jane Fisher was a sole trader selling a range of hair care products to various hair dressing saloons for five years. However, in 2020 COVID-19 pandemic induced prolonged and frequent lockdowns resulted in cancellation of most of her orders and she had to shut down her business. After a six-month search, she joined Axis Ltd as a procurement manager. She sought the job in Axis as she has been a shareholder of Axis Ltd for 7 years and did not sell those shares even when she had to close her business.

Analyse the two different types of business in this case study. Compare and contrast their advantages and disadvantages with examples.

Case Study 2
Rory Williams is an independent management consultant with a portfolio of clients. One of his long-term clients John Hawk has recently introduced Rory to Melody Malone who runs a secretarial service and has offered Rory a long-term contract through which Rory expects to generate the following stream of cash flows. Cash flows will occur at the end of the nominated years.

Rory expects the market interest rates will be 2.5% p.a. for the next 5 years, then it will increase to 5% p.a. for the following three years (years 6 – 8) and will increase again in years 9 – 10 to 6% p.a.

Assuming Rory’s expectations regarding cash flows and interest rates are correct, calculate the present value today and future value in 10 years’ time of all these cash flows. (Show all calculations and show answers correct to the nearer cent.)

Case Study 3
Tim Shaw is a portfolio manager of a large fund. It is December 2021 and Tim intends to sell two bonds he holds. Each bond has a face value of $100,000, a coupon rate of 8% p.a., paid half-yearly, and a yield to maturity of 10% p.a. The first bond will mature in three years and the second bond will mature in 5 years. With the funds Tim intends to buy Sapphire Ltd shares. Sapphire Ltd shares just paid a dividend of $1.20 per share in December 2021. Tim believes the dividend is expected to increase by 20% in December 2022, 15% in December 2023, 10% in December 2024, and thereafter by 5% per year forever from December 2025 onwards. Tim requires a 12% p.a. return on Sapphire Ltd shares.
If Tim sells both bonds and use the funds to buy Sapphire Ltd shares, how many shares he can buy (Show all calculations to two decimal places, show final answer correct to whole number.)

Case Study 4
22marksBelow is the monthly share price data for Afterpay Limited (ASX code APT.AX) for2020 (Source: https://finance.yahoo.com)

Afterpay Limited did not pay any dividend in 2020.
a. Calculate the monthly percentage returns for APT for 2020. (Show all calculations, show answers as percentage correct to two decimal places.)
b. Calculate the risk measured by the standard deviation for APT. (Show all calculations, show answer as a percentage correct to two decimal places.)
c. If the standard deviation for the market is 8.02%, how does this compare with APT’s standard deviation calculated in part b Explain your conclusions.

Answer

Answer to case study 1 of finance assignment
The two different types of business in this case study which was stated are, firstly Jane Fisher was a selling hair product to hairdressing salons. The advantage in this business structure is that Jane was working as a middleman between the product supplier and hairdressing salons, based on the demand of the salon Jane used to supply the products. The disadvantage in this business structure is that the products are used based on the demand of consumers or consumers visiting the salon for any services (Chen et al., 2021). In the pandemic situation, as the hairdressing salon was closed no consumers were able to visit, thus it tends to order cancellation and shut down her business. In the second business, Jane joined Axis Ltd as a procurement manager after searching for six months job, and at the same time, she is also a shareholder of Axis Ltd for 7 years. Regardless of the tough situation, to close the trading business of hair care products she did not sell the shares. The advantage which this business structure has is, Jane has gathered experience of investing money in the stock market and Axis Ltd has provided her with the post of procurement manager because of the shares she is holding. As a procurement manager, she will be able to source products and services for the organisation and can able to face challenges which will act as an advantage (Fabeil, et al., 2020). The role which Jane has to play is focused to meet the internal risk, thus there are not many disadvantages involved in this business structure.

Answer to case study 2

Net future value at 10th year 13996.32
Answer to Case study 3:
Face value = $100000
Coupon rate = 8% per annum paid half yearly
Yield to maturity = 10%
Bond 1 maturity = 3 years
Bond 2 maturity = 5 years
Price of bond 1 = (100000*8%/2)*(1-(1+10%/2)^(-3*2))/(10%/2)+100000/(1+10%/2)
= 115540.8635
Price of bond 2 = (100000*8%/2)*(1-(1+10%/2)^(-5*2))/(10%/2)+100000/(1+10%/2)
=126125.035
Hence, total amount in hand = 126125.035 + 115540.8635
= 241665.8985
Now, it is given that the current dividend of Sapphire Ltd share is $1.20
g1 = 20%
g2 = 15%
g3 = 10%br
g4 = 5%
and required rate of return (r) = 12%
hence, the share price of Sapphire Ltd is calculated as
P = 1.20*(1+20%)/(1+12%) + 1.20*(1+20%)*(1+15%)/(1+12%)^2+1.20*(1+20%)*(1+15%)*(1+10%)/(1+12%)^3+1.20*(1+20%)*(1+15%)*(1+10%)*(1+5%)/(1+12%)^4+1.20*(1+20%)*(1+15%)*(1+10%)*(1+5%)/((1+12%)^4*(12%-5%))
=22.48288494
Therefore, total number of shares can be purchased
= 241665.8985 / 22.48288494
=10748.88294
= 10748 (aprx)

Answer to Case study 4
Part [a]

Part [b]

Part [c]
It is given that the market risk is 8.02%, whereas the risk calculated above is 28.67%. Hence, it can be concluded that the market is far less risker than this Afterpay Limited stock. Therefore, it can be concluded that investment in the market index will be beneficial than investment into this specific stock.

References
Chen, J., Huang, J., Su, W., Štreimikien, D. and Baležentis, T., 2021. The challenges of COVID-19 control policies for sustainable development of business: Evidence from service industries. Finance assignment Technology in Society, 66, p.101643. Fabeil, N.F., Pazim, K.H. and Langgat, J., 2020. The impact of Covid-19 pandemic crisis on micro-enterprises: Entrepreneurs’ perspective on business continuity and recovery strategy. Journal of Economics and Business, 3(2).