Business Finance - Part A

  1. Calculation of the portfolio expected return and risk for various combinations

Returns:

CSL

Return

TLS

Return

RIO

Return

WES

Return

AJXO

Return

3.51

-0.08725

275.76

-0.02761

100.4

0.035483

41.4

-0.02316

6,684.10

-0.02393

3.83

0.101596

283.48

0.101847

96.9

0.06414

42.37

0.063579

6,846.00

0.027035

3.46

-0.00576

256.03

0.091299

90.88

-0.0195

39.76

-0.00101

6,663.40

-0.00373

3.48

-0.06669

233.69

-0.03026

92.67

0.056492

39.8

0.017744

6,688.30

0.012654

3.72

-0.05746

240.87

0.047832

87.58

-0.1116

39.1

-0.0023

6,604.20

-0.03107

3.94

0.03093

229.62

0.065788

97.92

-0.04795

39.19

0.080468

6,812.60

0.02886

3.82

0.053776

215

0.045241

102.73

0.033858

36.16

-0.02431

6,618.80

0.034101

3.62

0.068598

205.49

0.034256

99.31

0.050387

37.05

0.028472

6,396.90

0.011224

3.38

0.017911

198.57

0.01845

94.43

-0.03619

36.01

0.038499

6,325.50

0.023158

3.32

0.058932

194.94

0.006072

97.91

0.05371

34.65

0.04335

6,180.70

0.001895

3.13

0.016103

193.76

-0.00494

92.79

0.099522

33.18

0.058329

6,169.00

0.050585

3.08

0.088193

194.72

0.050342

84

0.103774

31.3

-0.00032

5,864.70

0.037933

2.82

-0.02797

185.16

0.042813

75.72

0.032755

31.31

0.020001

5,646.40

-0.00368

2.9

-0.06022

177.4

-0.05803

73.28

-0.04169

30.69

-0.08162

5,667.20

-0.02837

3.08

-0.03509

188

-0.06741

76.4

-0.03042

33.3

-0.06707

5,830.30

-0.06271

3.19

0.028619

201.11

-0.12246

78.76

0.079514

35.61

-0.03151

6,207.60

-0.01787

3.1

0.098218

227.31

0.145093

72.74

-0.11002

36.75

-0.29703

6,319.50

0.006238

2.81

0.081527

196.61

0.020503

81.2

-0.02721

49.46

0.002024

6,280.20

0.013724

2.59

-0.06719

192.62

0.035779

83.44

0.005649

49.36

0.08011

6,194.60

0.029937

2.77

-0.13803

185.85

0.087026

82.97

0.038204

45.56

0.040081

6,011.90

0.004869

3.18

0.012658

170.36

0.091525

79.86

0.093934

43.77

0.05181

5,982.70

0.038039

3.14

-0.06474

155.46

-0.0484

72.7

-0.11008

41.56

0.00555

5,759.40

-0.04358

3.35

-0.08027

163.17

0.108313

81.16

0.054567

41.33

-0.05827

6,015.96

-0.00361

3.63

0.01108

146.42

0.035594

76.85

0.013625

43.81

-0.01383

6,037.70

-0.00453

3.59

0.054377

141.3

-0.01433

75.81

0.066255

44.42

0.01132

6,065.10

0.015821

3.4

-0.04035

143.34

0.031249

70.95

0.021368

43.92

0.049473

5,969.90

0.010254

3.54

0.014225

138.93

0.036429

69.45

0.042954

41.8

0.011308

5,909.00

0.039244

3.49

-0.05029

133.96

0.041457

66.53

-0.0195

41.33

-0.03073

5,681.60

-0.00577

3.67

-0.1108

128.52

0.019803

67.84

0.030684

42.62

0.045359

5,714.50

-0.00107

4.1

-0.04763

126

-0.09119

65.79

0.039057

40.73

0.01509

5,720.60

-0.00016

4.3

-0.02299

138.03

0.065413

63.27

0.007297

40.12

-0.06232

5,721.50

-0.00054

4.4

0.041769

129.29

-0.0249

62.81

0.038463

42.7

-0.007

5,724.60

-0.03426

4.22

-0.09918

132.55

0.05601

60.44

-0.00033

43

-0.04702

5,924.10

0.010043

4.66

-0.03376

125.33

0.061453

60.46

-0.02499

45.07

0.05355

5,864.90

0.026381

4.82

-0.03666

117.86

0.048324

61.99

-0.07293

42.72

0.059309

5,712.20

0.016112

5

-0.0198

112.3

0.111912

66.68

0.107229

40.26

-0.04564

5,620.90

-0.00796

5.1

0.009852

100.41

0.024294

59.9

0.036553

42.14

0.00858

5,665.80

0.040577

5.05

0.013958

98

-0.02529

57.75

0.063812

41.78

0.018602

5,440.50

0.02283

4.98

-0.03938

100.51

-0.06257

54.18

0.048596

41.01

-0.07264

5,317.70

-0.02198

5.18

-0.01533

107

-0.01023

51.61

0.080883

44.1

0.038368

5,435.90

0.000534

5.26

-0.09254

108.1

-0.08763

47.6

-0.04035

42.44

-0.01148

5,433.00

-0.02354

5.77

0.037074

118

0.05058

49.56

0.085472

42.93

0.068195

5,562.40

0.060969

5.56

-0.00538

112.18

-0.03141

45.5

0.017963

40.1

-0.01313

5,233.40

-0.02737

5.59

0.042015

115.76

0.095846

44.69

-0.1428

40.63

-0.05133

5,378.60

0.023781

5.36

0.005613

105.18

0.036206

51.55

0.188588

42.77

0.031349

5,252.20

0.032785

5.33

0.015123

101.44

-0.01254

42.69

0.05811

41.45

0.058621

5,082.80

0.040533

5.25

-0.06988

102.72

-0.01238

40.28

0.028966

39.09

-0.07584

4,880.90

-0.02521

5.63

#DIV/0!

104

#DIV/0!

39.13

#DIV/0!

42.17

#DIV/0!

5,005.50

#DIV/0!

 

 

CSL

TLS

RIO

WES

AXJO

Expected return

-1.01%

2.07%

2.00%

-0.04%

0.62%

Standard Deviation

5.79%

5.87%

6.50%

6.26%

2.67%

Variance

0.336%

0.345%

0.422%

0.392%

0.071%

 

Portfolio

CSL TLS

TLS RIO

RIO WES

Expected return

0.53%

2.04%

0.98%

Correlation Coefficient

0.216

-0.092

-0.283

Standard Deviation

0.21%

0.09%

0.15%

Risk Adjusted Return

2.59

23.66

6.74

  1. Determination of the recommended combination to minimize the portfolio risk

Historical monthly rates of return for the market index

The rate of return (or ROR) is referred as the loss or gain on an investment over a specific period of time. In other words, ROR represents profit (or loss) against the cost of investment. It is typically as percentage. When the ROR results in a positive value, then a profit has been generated and when ROR becomes negative, the investor has incurred a loss on the investment (Sukono et al. 2018).

For investment in share market, the rate of return is calculated using following formula:

Historical average rate of return and standard deviation of returns

Average Return: it tells investors about how a particular security, portfolio of securities or an index performed in the past.

Standard Deviation: or SD is a popular statistical tool which is represented by the letter 'σ'. It is used to measure the amount of dispersion or variation of a set of data values relative to its mean (or average). It helps in interpreting the reliability of the set of data.

A smaller standard deviation indicates observation points are lying closer to the mean value, and there will be higher reliability. On the other hand, a larger standard deviation indicates that observation points are spread far from the mean value and the reliability will be low (Singhal, Choudhary and Biswal 2019). 

Calculation: Standard deviation is square root of variance and variance is calculated by calculating the variation between the observation points relative to their mean.

Where:

  • =The mean (average) of the set of observations
  • xi = ithobservation value
  • n= number of points of observations in the set of observations

As per the calculations shown in the above portion, the most appropriate combination for the required purposes to minimize the portfolio risk and maximize returns is of Telstra Ltd and RIO Tinto Ltd. The comparison is shown in the following table:-

Portfolio

CSL TLS

TLS RIO

RIO WES

Expected return

0.53%

2.04%

0.98%

Correlation Coefficient

0.216

-0.092

-0.283

Standard Deviation

0.21%

0.09%

0.15%

Risk Adjusted Return

2.59

23.66

6.74

Sharpe Ratio

-0.390

16.526

2.521

As it can be clearly seen in the above table that TLS and RIO has the highest average of risk adjusted return of 23.66 times.

  1. Comparison of recommendation in 2b and 1
  • The recommendation in 1 was CSL ltd and Telstra Ltd, the recommendation was typically based on the fundamentals of the companies and the industries in which it works.
  • The recommended combination in 2b was Telstra Ltd and RIO Tinto Ltd is based on the risk adjusted rates of returns, as this combination has the highest rate.
  1. Calculation of the optimal weight of the two assets recommended

The recommended combination in 2b was Telstra Ltd and RIO Tinto Ltd. The portfolio has the expected return and minimum standard deviation. In order to determine the optimal portfolio

Part B - Capital Budgeting

Given:

First Year

 

Sales (units)

50000

Annual sales Growth

0%

   

Price per bearing

22

Price rise per year

0%

   

Variable cost (VC) for 8 years

350,000

Variable cost (VC) for year 9 & 10

360,000

   

Fixed cost (thousands)

250,000

Annual growth

0%

   

Project Life (Years)

10

   
   

Plant

2,000,000

Equipment cost

700,000

WC requirement

300,000

Total Initial Investment

3,000,000

   

Depreciation using SLM

10%

Dep for Plant

200,000

Dep for Equip

70,000

Total Depreciation

270,000

   

Salvage Value

 

Plant

800,000

Equip

100,000

Total Salvage

900,000

   

Tax Rate

30%

   

Required rate of return

7%

Solution

  1. Preparation of cash flow statement and computation of the NPV and IRR of the proposed project

After Tax Cash Flow

Particulars

Years

1

2

3

4

5

6

7

8

9

10

Unit Sales

50000

50000

50000

50000

50000

50000

50000

50000

50000

50000

Sales Price

22

22

22

22

22

22

22

22

22

22

 Total Sales

1,100,000

1,100,000

1,100,000

1,100,000

1,100,000

1,100,000

1,100,000

1,100,000

1,100,000

1,100,000

           

VC

350,000

350,000

350,000

350,000

350,000

350,000

350,000

350,000

360,000

360,000

Contribution

750,000

750,000

750,000

750,000

750,000

750,000

750,000

750,000

740,000

740,000

           

Fixed Cost

250,000

250,000

250,000

250,000

250,000

250,000

250,000

250,000

250,000

250,000

EBITDA

500,000

500,000

500,000

500,000

500,000

500,000

500,000

500,000

490,000

490,000

Less: Depreciation

270,000

270,000

270,000

270,000

270,000

270,000

270,000

270,000

270,000

270,000

           

EBT

230,000

230,000

230,000

230,000

230,000

230,000

230,000

230,000

220,000

220,000

Less: Taxation

69,000

69,000

69,000

69,000

69,000

69,000

69,000

69,000

66,000

66,000

           

EAT

161,000

161,000

161,000

161,000

161,000

161,000

161,000

161,000

154,000

154,000

Add: Depreciation

270,000

270,000

270,000

270,000

270,000

270,000

270,000

270,000

270,000

270,000

Working Capital

-

-

-

-

300,000

Salvage Value

-

-

-

-

900,000

CFAT

431,000

431,000

431,000

431,000

431,000

431,000

431,000

431,000

424,000

1,624,000

The expenditure will be capitalized along with the cost of the plant and equipment.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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