# Finance for Business Group Assignment Help

## Introduction

In this finance business group assignment we will have clear idea about the project vulnerability which an organization could elect out of the following investment options. There are various methods and means which are used in this project report to develop an effective business decision to find out several inflows and outflows of the company throughout the time. In the starting of this finance business project report we will discuss details of Emu Electronics which is working in selling electronics items in the growingindustry. Different cost of equity and cost of debts have been calculated to determine that cost of capital of the company HCL owned by Bob. In addition to this Pure play approach has been used in this file to represent the data of HCL and all the relevant data to compute financial analysis Harvey Norman Company’s annual report has been taken into consideration.

### Body context

#### 1. What is the payback period of the project?

Payback period is the time required to collect the cash invested in acquiring project which is done by calculating the time engaged in generating adequate amount of cash inflows to cover the total outflow made in business life cycle. In the other term it is the simple ways to evaluate the risk associated with a proposed project. The payback period is calculated in terms of years or fraction is converted in months (Stubbs, 2011).

 Calculation of IRR Amount(\$) Year 0 -35450000 Year1 4023214.286 Year2 6906887.755 Year3 5407366.071 Year4 4697066.327 Year5 52381249.63 IRR 19%

Calculation of payback period

 Cash Inflows Cumulative cash inflows Year1 4023214.286 4023214.286 Year2 6906887.755 10930102.04 Year3 5407366.071 16337468.11 Year4 4697066.327 21034534.44 Year5 52381249.63 73415784.07

#### 2. What is the profitability index of the project?

Profitability index is also known with its other name profit investment ratio and value driven investment ratio. It is the tools or method to give the ranking to vulnerability of the project in orderly manner. This index is the simple measures to identify the project effectiveness in terms of its cash inflow and particular investment amount in the given time span.
Profitability index = present value of cash inflow/ present value of cash outflow

75069650/108388240.9=1.4438357

#### 3. What is the IRR of the project?

The IRR stands for internal rate of return on a project. It is used to determine the rate of return of the project at which Net present value of the project will be zero. In this project report I have calculated all the possible IRR and the idol IRR should be 19 % (Byung, et. AL., 2013).

 Calculation of IRR Amount(\$) Year 0 -35450000 Year1 4023214.286 Year2 6906887.755 Year3 5407366.071 Year4 4697066.327 Year5 52381249.63 IRR 19%

#### 4. What is the NPV of the project?

Net present value is the amount which is the sum of the discounted cash inflow deducted with the original investment made in the initial time period of the project.
Net present value factor will be 30907178.21. This calculation is made by considering all the possible factors which is necessary for finding the present value of the investment made and the following inflows received throughout the time.
Total outflow of the project will be

 Year0 Year1 Year2 Year3 Year4 Year 5 Units 64000 106,000 87000 78000 54000 Sales 31040000 51410000 42195000 37830000 26190000 Less: Variable cost 13120000 21730000 17835000 15990000 11070000 Contribution 17920000 29680000 24360000 21840000 15120000 Less Fixed Cost 5100000 5100000 5100000 5100000 5100000 Less: Depreciation 5800000 5800000 5800000 5800000 5800000 Profit 7020000 18780000 13460000 10940000 4220000 Less: Tax 2106000 5634000 4038000 3282000 1266000 Profit after tax 4914000 13146000 9422000 7658000 2954000 Add: Depreciation 5800000 5800000 5800000 5800000 5800000 Add: Working capital recovery 58341040 ADD: Salvage value after tax 3850000 Net cash inflow 10714000 18946000 15222000 13458000 70945040
 Net cash inflow Present Value Factor @12% P. V. Amount Year-1 10714000 0.892857143 9566071.429 Year-2 0.797193878 0 Year-3 15222000 0.797193878 12134885.2 Year-4 13458000 0.797193878 10728635.2 Year-5 70945040 0.797193878 56556951.53 Total 104090178.6

#### 5. How sensitive is the NPV to changes in the price of the new smart phone?

If price of the product sold in the market is being changed then there will be following changes to the amount of NPV which could be seen with the help of below computation.
In this case price of the product rate has been changed to\$ 500. Therefore company has seen increment in the net present value.

 Year0 Year1 Year2 Year3 Year4 Year 5 Total Units 64000 106,000 87000 78000 54000 Sales 32000000 53000000 43500000 39000000 27000000 Less: Variable cost 13120000 21730000 17835000 15990000 11070000 Contribution 18880000 31270000 25665000 23010000 15930000 Less Fixed Cost 5100000 5100000 5100000 5100000 5100000 Less: Depreciation 5800000 5800000 5800000 5800000 5800000 Profit 7980000 20370000 14765000 12110000 5030000 Less: Tax 2394000 6111000 4429500 3633000 1509000 Profit after tax 5586000 14259000 10335500 8477000 3521000 Add: Depreciation 5800000 5800000 5800000 5800000 5800000 Add: Working capital recovery 59271365 ADD: Salvage value after tax 3850000 Net cash inflow 11386000 20059000 16135500 14277000 72442365 Present Value Factor @12% 0.892857143 0.797194 0.797194 0.797194 0.797194 Present value of cash inflows 10166071.43 15990912 12863122 11381537 57750610 108152251.9 Cash Outflow Retype development cost 750000 750000 Marketing cost 200000 200000 Equipment cost 34500000 34500000 Net working capital 6400000 10600000 8700000 7800000 5400000 Present Value Factor @12% 0.892857143 0.797194 0.797194 0.797194 0.797194 Present value of cash outflows 5714285.714 8450255 6935587 6218112 4304847 74350000 Net Present Value 33802251.91

#### 6. How sensitive is the NPV to changes in the quantity sold?

NPV will be changed to 33318591 when there is made 5 % changes in the quantity of the product sold in the market by the company (Zhang, et. Al., 2012).

 Year0 Year1 Year2 Year3 Year4 Year 5 Total Units 67200 111,300 91350 81900 56700 Sales 32592000 53980500 44304750 39721500 27499500 Less: Variable cost 13776000 22816500 18726750 16789500 11623500 Contribution 18816000 31164000 25578000 22932000 15876000 Less Fixed Cost 5100000 5100000 5100000 5100000 5100000 Less: Depreciation 5800000 5800000 5800000 5800000 5800000 Profit 7916000 20264000 14678000 12032000 4976000 Less: Tax 2374800 6079200 4403400 3609600 1492800 Profit after tax 5541200 14184800 10274600 8422400 3483200 Add: Depreciation 5800000 5800000 5800000 5800000 5800000 Add: Working capital recovery 59845065 ADD: Salvage value after tax 3850000 Net cash inflow 11341200 19984800 16074600 14222400 72978265 Present Value Factor @12% 0.892857 0.797194 0.797194 0.797194 0.797194 Present value of cash inflows 10126071 15931760 12814573 11338010 58177826 1.08E+08 Cash Outflow Retype development cost 750000 750000 Marketing cost 200000 200000 Equipment cost 34500000 34500000 Net working capital 6518400 10796100 8860950 7944300 5499900 Present Value Factor @12% 0.892857 0.797194 0.797194 0.797194 0.797194 Present value of cash outflows 5820000 8606585 7063895 6333147 4384487 75069650 Net Present Value 33318591

#### 7. Should Emu Electronics produce the new smart phone?

As per the details available to us we would find that Net present value of the project undertaken is positive. Therefore EMU electronics produce the new smart phone.

#### 8. Suppose Emu Electronics loses sales on other models because of the introduction of the new model. How would this affect your analysis?

In this case we would be considering all the relevant cost of the project and profits derived by the company from the entireproject. There is need to measures all the possible benefits to the Emu electronics by selling all of its products in the market and then comparative analysis would be implemented to analysis the benefit of selling new products in the market and losses occurred due to loss in selling of other outdated models.

With the help of the complete analysis I would say that in order to maintain the adequate sell of other models in the phone industry company needs to keep the price of the product very high so that other buyers who are ready to buy give existing models could go for that. Therefore it could be said that if new model of the phone impacts sell of other model offering in the market analysis then company need not to invest its money in developing a new model phon.

### Part- B

Case study: In this scenario we are given that I have been hired in the treasury management department in the Hubbard Computer Ltd which was founded 8 years ago by the BOB. This company makes sales of the product to the customers who walks in store and talk with representative. Here in this case study we are asked to determine the cost of capital involved in the project. But Hubbard Computer Ltd is a private company whose shares are not listed on the ASX security exchange nor are even proper books of accounts maintained. Now bob wants to know the real cost of capital and advise us to use the pure play approach to estimate the cost of capital for Hubbard Computer Ltd. We have been given instruction to evaluate the cost of capital of the company by undertaken all the details of Harvey Norman as a representative company ( Block, 2011).

#### 2.1Find the book value of debt and the book value of equity?

Book value - it is the amount of debts and equity are the amount shown in the balance sheet of the company. With the help of the annual report of Harvey Norman we could say that company is having following book value of its capital structure
Equity capital structure

 Particular 2014 Amount(“000)\$ 2015 Amount(“000) \$ Contributed equity 380,328 259,610 Reserves 113,290 102,735 Retained profits 25 2,043,463 2,109,032 Controlling interest 2,537,081 2,471,377 Non-controlling interests 26 19,779 19,729 TOTAL EQUITY 2,556,860 2,491,106

Debt capital structure

 Particular 2014 Amount(“000)\$ 2015 Amount(“000) \$ Interest-bearing loans and borrowings 290,000 238,094

#### 2.2 Estimate the cost of equity

Cost of Equity: The cost of equity is the amount required to pay for holding the cash in the company’s operation. Shareholders are the actual owners of the company who accepts definite amount of return on their investment. The return they require from the company in return of their investment made in the company process is called cost of equity.

Cost of Equity = Risk free rate of return + Beta of Asset * (Expected Return of market – Risk Free Rate of Return)

The 10 years Treasury constant maturity rate can be used as the risk free rate for the company. Therefore the Risk Free rate as per updated Treasury Constant Maturity Rate is 2.48%.
Beta of the company is the sensitivereturn to the company and it is calculated on the basis of market share and its return to the shareholder in the significant time period.

It denotes the risk of the returns of company. The beta of Harvey Norman.7465.
The Market premium which is given to us could be computed with the help of given data which is between 4 to 6%.
It is the different between market rate of return and company’s rate of return.

In this project report we have taken market premium return is 4 %

Thus Cost of Equity = 1.75% + .7465 * 4.5%

= 5.11%

#### 2.3What is the most recent stock price listed for Harvey Norman?

The most recent stock listed price for the shares for Harvey Norman is 5.12.

#### 2.4What is the market value of equity or market capitalization?

Market value of the equity is also called market cap therefore with the help of annual report data we could say that Harvey Norman market capitalization is \$4539.224 Million (Febijanto, 2013).

#### 2.6 How many shares does Harvey Norman have outstanding?

Harvey Norman is having 1112.56 million shares outstanding during the year 2105.

#### 2.7 What is the most recent annual dividend?

Annual dividend of the company is 17 cents.

#### 2.8Can you use the dividend discount model in this case?

Yes we can easily use this model to estimate the price of the share in the given time period. There is following formulas given in this report which could be used todeterminethe price of the share.

5.12=100/X-14.30=5.11
There for with the help of this computation we could say that cost of equity is 5.11.

#### 2.9 What is the beta for Harvey Norman?

Beta of the Harvey Norman is 0.7658

#### 2.10What is the yield on government debt?

Yield on government debts is also known risk free investment bonds and yield is not fixed rate. It is varied with the type of guilt securities throughout the time. Yield on the government debts increased with the increment of the time period of the investment made. The average rate which could be used for determining the yield on government debts is 1.75 %.

#### 2.11 Using the historical market risk premium, what is the cost of equity for Harvey Norman using the CAPM?

Cost of Equity = Risk free rate of return + Beta of Asset * (Expected Return of market – Risk Free Rate of Return)

For determine the risk free rate of return we have taken  The 10 years Treasury constant maturity rate that can be used as the risk free rate for the company. Therefore the Risk Free rate as per updated Treasury Constant Maturity Rate is 1.75%.

Beta of the company is the sensitivereturn to the company and it is calculated on the basis of market share and its return to the shareholder in the significant time period(weighted average cost of capital 2014).

It denotes the risk of the returns of company. The beta of Harvey Norman is .7465.
The Market premium which is given to us could be computed with the help of given data which is between 4 to 6%.
It is the different between market rate of return and company’s rate of return.
In this project report we have taken market premium return is 4.5 %
Thus Cost of Equity = 1.75% + .7465 * 4.5%

= 5.11%

### 3 Calculation of Cost of debts

The cost of debt is very easy to calculate. In order to determine the actual cost of debt we first need to take different average of debts and interest rate then calculation will be made to decide the actual cost of debts. The interest expense of the company is \$33327.22 millionthe average value of its debt is \$ 561947 Million. (Elena, 2014).
This calculation is made on the basis of market value of the debts shown in the balance sheet of the Harvey Norman.

 Particular Amount of debts(Millions ) Interest rate Interest rate amount(Millions) Financial lease 139 9.50% 13.21 Borrowings 561808 5.92% 3331521 Total 561947 33327.22

Weighted average cost of debts of HarveyNorman would be 33327.22/561947*100=5.94%

 Particular Amount of debts Interest rate Interest rate amount(Millions) Financial lease 2900000000 5.33% 17197000 Total 290000 17197000

### 4. Calculate the weighted average cost of capital for Harvey Norman.

The Weighted Average Cost of Capital is the rate that a company is expected to pay on to all its securities holders to finance its assets. By using this information we could easily estimate the how much interest company’s paying to hold capital for the smooth running of the business in the long run. With the help of the formula given we could easily show the weighted average cost of capital of the company(Cuthbert, & Magni, 2016).

Weighted Average Cost of Capital

WACC = Equity/ (Equity + Debt) * Cost of Equity + Debt/ (Equity + Debt) * Cost of debt (1-tax

Rate)

2556860/2,556,860+290000000*5.13 + 290000000/2,556,860+290000000*5.94/1-.30

26.3169+ 5.88= 8.41 (Bas, . 2013).

### 5. You used Harvey Norman as a pure play company to estimate the cost of capital for HCL. Are there any potential problems with this approach in this situation?

Pure play method is a method used to estimate the beta coefficient of a company whose stocks are not publically traded on the securities stock exchange. Pure play method is used to represent data of HCL and Harvey Norman has been taken as representative company(Mawih, 2015).

• Harvey Norman is a listed company which has been running its business in Australia since very long time. Bob has used pure play approach to make complete level of valuation of its share prices and cost of debts of the company. There are following problems which are taken into consideration while taking Harvey Norman as a representative company.
• Harvey Norman is a listed company which is engaged in electronic business while at the same time HCL is a listed company therefore data used in the calculation might be misleading for the complete level of interpretation of data.
• Unlisted company cannot be compared with the listed companies as there are various rules and regulation to follow which put sector cap on the functioning of the company.
• Costs of capital are the average cost of all equity and debts of the company. Harvey Norman is having various long term debts and borrowings at market value and book values. Market value amount is used in the balance sheet and book value is used in the notes of account therefore this two set of values has resulted into mist of calculating cost of capital for the HCL.
• Harvey Norman is a listed company and information collected from the annual report is price sensitive information.

#### Conclusion

In this finance for business group assignment we have understood various problems related with the cost of capital of the HCL limited owned by BOB. With the help of the given data I have understood the different pure play approach in which HarveyNorman has been taken as a representative company of HCL limited. There are several calculation is made to determine the cost of capital and market capitalization of the company. In addition to this I have gone through all the sensitiveinformation given in annual report of the company and measured several changes occurred in the capital structure of the company for understanding HCL cost of equity and debts of the HCL. Now I would like to end my report by saying that annual report is the complete set of information which represents company’s capital structure and its various corporate governance activities in identified manner.

### References

Bas, E. 2013, "A robust approach to the decision rules of NPV and IRR for simple projects”, Applied Mathematics and Computation, vol. 219, no. 11, pp. 5901-5908.
Block, S. 2011, "Does the Weighted Average Cost of Capital Describe the Real-World Approach to the Discount Rate?", The Engineering Economist, vol. 56, no. 2, pp. 170-180.
Byung-Cheol, K., Euysup, S. &Reinschmidt, K.F. 2013, "Probability distribution of the project payback period using the equivalent cash flow decomposition", Engineering Economist, vol. 58, no. 2, pp. 112.
Chang, C., Lin, H., Tzeng, C., Yang, K., Chuah, Y. & Ho, M. 2012;2011;, "Energy saving and payback period for retrofitting air conditioning systems in Taiwan", Trans Tech Publications Ltd, Zurich, pp. 2850.
Cuthbert, J.R. &Magni, C.A. 2016, "Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR", International Journal of Production Economics, vol. 179, pp. 130-140.
Febijanto, I. 2013, "?Economic system of Cikaso Mini Hydro Power Plant as A CDM Project for Increasing IRR", Mechatronics, Electrical Power, and Vehicular Technology, vol. 4, no. 2, pp. 89-98.
Mawih Kareem Al Ani 2015, "A Strategic Framework to Use Payback Period (PBP) in Evaluating the Capital Budgeting in Energy and Oil and Gas Sectors in Oman", International Journal of Economics and Financial Issues, vol. 5, no. 2