Financial Analysis Report

Income estimations

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Year

2017

2018

Net profit

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        500,000.00

          600,000.00

Dividend payout

60.00%

60.00%

Dividend

        300,000.00

          360,000.00

Jack Black Equity holding

10.00%

10.00%

Dividend of Jack Black

          30,000.00

            36,000.00

C1 (consumption in year-1)

            40,000.00

Y1 (income of year-1)

            30,000.00

Y2 (income of year-2)

            36,000.00

Capital market interest rate

8%

PV of C2

            23,333.33

PV of Y2

            33,333.33

C2 (consumption in year-2)

            25,200.00

((30000+33333.33)-40000)*(1.08)

Therefore, Jack Black can consume a sum of $25200 in year-2.

Risk free rate of interest

6%

Market risk premium

8%

Company Name

Expected Return

Beta

CAPM

Undervalued or overvalued

Reason

Prawn Ltd

10.80%

      0.50

10.00%

Undervalued

Expected return is higher than CAPM

Salmon Ltd

13.00%

      0.80

12.40%

Undervalued

Expected return is higher than CAPM

Shark Ltd

15.60%

      1.20

15.60%

At par

Expected return is equal to CAPM

Trout Ltd

17.40%

      1.70

19.60%

Overvalued

Expected return is lower than CAPM

Market

14.00%

      1.00

Figure 1: Security Market Line Chart

Present value of the constant income flows at the beginning of the sixth year

6th Year

300000

Required return

10%

PV (300000/10%)

3000000

Present value now of the whole income stream

Year

CF

[email protected]%

PV

1

                        –  

              0.909

                        –  

2

                        –  

              0.826

                        –  

3

                        –  

              0.751

                        –  

4

       120,000.00

              0.683

         81,961.61

5

       220,000.00

              0.621

       136,602.69

6

   3,000,000.00

              0.564

   1,693,421.79

Present value

   1,911,986.10

Existing loan details:

Loan

600000

Tenure (months)

120

Interest rate monthly

0.60%

EMI

$7,028.51

Loan (after three years)

   462,687.16

Tenure (months)

84

Interest rate monthly

0.80%

EMI

$7,585.87

Extra period added to the term of the loan if Linda adopts the second alternative:

Loan

   462,687.16

Interest rate monthly

0.80%

EMI

$7,028.51

New Tenure (months)

                   94

Existing Tenure (months)

84

Extra period

                   10

Plan-A

Year

Cash outflow

[email protected]%

PV

0

100000

             1.000

     100,000.00

1

3000

             0.917

          2,752.29

2

3000

             0.842

          2,525.04

3

3000

             0.772

          2,316.55

Present value

     107,593.88

Plan-B

Year

Cash outflow

[email protected]%

PV

0

90000

             1.000

       90,000.00

1

8000

             0.917

          7,339.45

2

9000

             0.842

          7,575.12

3

10000

             0.772

          7,721.83

4

10000

             0.708

          7,084.25

Present value

     119,720.66

Annual equivalent costs (AEC)

Plan-A

Plan-B

Present value

   107,593.88

   119,720.66

Annual equivalent costs

                2.53

                3.24

AEC

     42,505.48

     36,954.01

Recommendation to William Gray:

The annual equivalent cost of Plan-B is less than Plan-A, therefore, William Gray should select Plan-B.

Position on 15 November, 2016

Bond-1

Bond-2

Face value

100000

100000

Coupon (Half yearly)

4%

4%

Maturity (Half years)

7

15

15 November, 2016 to 15 May 2020

15 November, 2016 to 15 May 2024

Yield (Half yearly)

4%

4%

Price at 15 May, 2017

Bond-1

Bond-2

Face value

   100,000.00

   100,000.00

Coupon (Half yearly)

4%

4%

Maturity (Half years)

6

14

Yield (Half yearly)

5.00%

5.00%

Interest amount

       4,000.00

       4,000.00

Price of bond

     94,924.31

     90,101.36

It could be observed that the price of bond-1 has gone down from $100,000 to $94,924.31 and the price of bond-2 has gone down from $100,000 to $90,101.36.

Cash outflows

Year

$

0

-535000

Cost of technology and additions to current assets

1

0

2

-15000

Cost of overhauling the technology

Savings lost on building

PV of Rent for 4 years net of tax

                   84,000.00

                          3.04

   255,137.35

Less: PV of Payment to cancel the lease

                   33,000.00

                          1.00

     33,000.00

PV of savings lost

   222,137.35

Cash inflows

Year

Labor costs Savings

Tax savings on depreciation

Salvage

Recovery of current assets

Total

1

                 190,000.00

                 36,000.00

  226,000.00

2

                 190,000.00

                 36,000.00

  226,000.00

3

                 190,000.00

                 36,000.00

  226,000.00

4

                 190,000.00

                 36,000.00

     20,000.00

       35,000.00

  281,000.00

Net present value

Year

Net cash flows

[email protected]%

PV

0

-535000

                      1.0000

  (535,000.00)

1

226000

                      0.8929

   201,785.71

2

211000

                      0.7972

   168,207.91

3

226000

                      0.7118

   160,862.34

4

281000

                      0.6355

   178,580.58

PV of cash flows

   174,436.54

Less: PV of savings lost

   222,137.35

Net benefit or loss in present value terms

    (47,700.81)

Note: The cost of fee of $27,000 paid to conduct a feasibility study has been considered to be irrelevant and hence ignored in computation of net present value.

The present value of net benefits is negative that means the company will incur loss if new technology is adopted. Therefore, it is advised that the company should not go for new technology.

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