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Corporate Finance Assignments Name Class Instructor 1. a) A = $10,000 a = $800 R = 10% N = 5.3 years 1. b) Given, Lottery Amount = $200,000 Amount Spent = $20,000 Amount of investment = $200,000 - $20,000 = $ 180,000 P= $180,000

R = 10%

K = 12

N = 12*4 i.e. 48 Instalments

Required: A As per the formula: P = A/I {1 – (1+ I)^ -N} I = R/ K* 100 I = 10/ 12 * 100 I = 0.00833 Putting these figures in the equation, 180,000 = A/0.00833 (1 – (1 + 0.00833)^ -48 1,500 = A (1 – 1/ 1.48912)



1500 = A ( 1 – 0.67154)



1500 = A * 0.32846



A = 1,500 / 0.32846

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A = $4,566. 76

Hence payment size should be $4,566. 76 1. c) a = $4,000 k=1

n= 10

r=5%

r = 5/ 1* 100 i.e. 0.05

Required: A (Total savings) As per the equation, A = a/i {(1 + i)^n – 1} Putting these figures in the equation, A = 4,000/ 0.05 {(1 + 0.05)^ 10 – 1 } = $50,311. 57 Therefore the required answer is $50,311. 57 1. d) Given, a = $ 20,000

n = 10

k=1

i = r / k * 100 = 6 / 1 * 100 = 0.06 As per the formula A = a/i {(1 + i)^n – 1} Putting these figures in the equation, A = 20,000/ 0.06 {(1 + 0.06) ^ 10 – 1)}

r=6%

A = $ 263,615. 9 No, she should not sell out her future rights today for $ 150,000 1. e) Given, PMT Amount = $1,000 n = 10 r = 12% g = 10 % As per the formula: Future Value = PMT (i– g) [(1 + i) ^n − (1 + g)^n] (1 + i *T) Putting the figures in the equation, = 1,000 (0.12 – 0.10) [(1 + 0.12) ^ 10 – (1 + 0.10) ^ 10] (1 + 0.12 * 1) = $25,605.29 Therefore, the required answer is $25,605.29 2.a. As opined by Jones and Felps, (2013) maximization of wealth and maximization of profit are two different concepts which has two different purposes and methods. Firms who want to prosper in the business and have long-term survival objectives go for maximization of shareholder’s wealth. On the contrary for short-term projects and ventures profit maximization is aimed at. Profit maximization seeks that though venture earns profits it may happen that the share price of the company fall. In this case firm is having profits but destroying shareholder’s wealth which is not good for a healthy business. Firms who aim at maximizing the wealth that is, the share price of the company achieve greater advantage in the market. Gaining confidence of the shareholders by doing projects that are beneficial from their perspective helps the firm take strategic decisions in the future course of action. Firms take projects that have regular cash flows and have positive Net Present Value so that wealth is created (Benamraoui et al., 2017). So, we can say that maximization of wealth concepts takes into consideration the time value of money.

But on the other hand, profit maximization neglects this aspect and focus on core profit rather than taking into account time value of money. So, in this case the ultimate looser are the shareholders, that is, the equity holders who own the shares of the company and are the real investors in the projects. Shareholders that invest their money in the company look for positive returns. Being able to give that return and making decisions that are for the welfare of the company is the responsibility of the board. But while taking short-duration projects it is important to aim at profit maximization, this is because if loss occurs, it is difficult for the company to bounce back and compensate the loss(Thomas M. Jones, 2013). Similarly, in case of

long-duration projects it is possible that the initial investment is high, cash flows are less but later cash flows increase in volume and ultimate result is a profit.

1. Corporate managers aim at making investments that do not drain the wealth of the

company. For fulfilling this desire they make risk-free investments. But in reality, taking investment decisions and making investment in projects depends upon the risk taking appetite of the firms. Firms who have a little risk taking capacity shall invest in projects which are a bit risky and have prospects to bear higher rate of return Jones and Felps, (2013). On the other hand firms which are completely risk averse make investments in projects which are risk free and produce low rate of return. Companies that want to earn extra ordinary returns have to invest in projects that are risk. The saying is true, no risk no gain. But practically risk lover investors do not exist. But still firms take investment decisions which produce little more than risk free return. Cash flows are discounted by the firm by required rate of return, if it results in negative net present value then the project decision is dropped. Risk aversion is normal but investing only in risk free projects is not practical. A little risk is good but based on proper evaluation (Thomas M. Jones, 2013).

It is the duty of project manager to prepare reports and make assessment regarding the projects before accepting a project. Those projects undertaken by companies reflect their risk-aversion.

Corporate managers try to lower their responsibility and result in investing in low return bearing and lesser risk. Less risk lesser return. Whereas, high risk may result into higher return.

Managers sometimes tend to follow the traditional investment decisions and fear from experimenting new investments and projects (Thomas M. Jones, 2013).This is also a very essential factor that they do not take risk. They fear losses and take up the conservative approach.

But in this modern business era, managers like to take risk, make assessments of future viability of the project and then only come at a conclusion to accept or reject any project. viii. As an investor an ideal decision would be to invest in RIO. This is because the holding period return in each case is higher in case of RIO as compared to CBA. Moreover, the beta of RIO is lower than CBA or combined portfolio, therefore, if the firm invest in RIO it will have less risk and more profit which is more conventional. But for risk-lover investors, CBA can be beneficial as it may result in high returns in long-run (Benamraoui et al., 2017).