Financial Management

Section 1

1. The Diagram shows the relationship between a corporation and Investors in

security markets. The corporation attains money by selling securities to investors in
the security Market. This is a primary market transaction. A security market is a
market that allows the buyers and sellers of securities to process their transaction,
in these market securities such as stocks and bonds are traded. As seen in the
diagram securities leave the corporation, are received by the investors and cash
goes from the investors to the corporation to complete the transaction. This cash is
then used by the corporation to invest in securities and/or assets which will
generate returns. The securities are then traded among the investors in the
secondary market. The corporation pays taxes to the government and interest to
their investors. Then from the cash flow from operations the corporation
redistributes cash back to their investors. There are three types of securities
which are namely
❖ Debt- This is when persons acquire loans called bonds in which they are to
pay back at high interest rates
❖ Equity- These are shares purchased in a company.
❖ Derivatives – These are assets, Stock or Bonds and provide substantial
returns to the investor.

Conclusively, the diagram shows how investors supply the corporation with funds
and how the corporation uses it in investing to earn returns to repay the investors.

2. The assumed objective of a Corporation is to maximize shareholder wealth by

maximizing share price. The corporation thrives on making their business look
appealing to shareholders. Since it is not run by the owners profit maximization is
not the main objective of a corporation. The higher the prices of shares the more
wealthy shareholders appear to be, therefore making the market price of the shares
 appear lucrative. This is necessary to keep the investors/shareholders satisfied
with their investment and it is appropriate because if profit maximization was the
goal of the owners , the objective to safeguard the shareholders interest would
not be held at highest regard and therefore would not result in the increase in
value of Market price of shares in the corporation.

3) What I would consider is:

Facts provided
Mortgage
Year of taking Mortgage 2015
Term 20 years
Amount $350000

Income (monthly)
Household income $6,000
Expenses $2,500
Loan payment $2,450
Disposable income $1,050

Other
3 children with ages 8, 10, 12

The assumptions I would make are:

1- Loan Payments are not included in the monthly payment
amount.
2- Loan is being done using reducing balance.
3- There is no penalty for early settlement
4- Income is steady without loss of employment and there are no
salary increases or promotions.
5- Disposable income is saved.
6- Interest is compounded monthly.
Options:
Before making a decision, first we are going to calculate the amount
being paid into principal. To do this we must first calculate the interest
rate.

Balance 350,000.00
Monthly payment (2,450.00)
Periods 240.00
Compounding periods per year 12

Option 1

Option 1 - Continue
as usual

Quantitative factors
Money saved 214,200
Interest to pay 180,490.85

Qualitative
No of years till
maturity of loan 17
Age of children 25, 27, 29

Option 2

Option 2 Increase loan payment by disposable income

Quantitative factors
Money saved 88,200
Interest to pay 100,564.46

Qualitative
No of year till maturity of loan 10
Age of children 18, 20, 22
 Option 3 .

Option 3 Increase loan payment by 300, then by 800 when oldest child turns
18 & can work to help support

Quantitative factors
Money saved 145,400
Interest to pay 144,062.41

Qualitative
No of year till maturity
of loan 13
Age of children 21, 23, 25

From the above options I conclude that option 2 is best , with the assumption that the
disposable income is saved this can be paid toward the mortgage and settle it in ten years
while the children are still young and of age to make contributions toward the household
income. This increases the loan payment to $3000 ($2450+$1050) and save the family
$88,200 in the long run.
4)
My mother is 60 and therefore is not able to wait very long top receive returns on
investments. Therefore I would select investing in fixed income investments such as a mix
of Bonds, Certificate of deposits and Money market funds. These are the investments
proven to have lower risk. According to MGMT2023 Unit 4 “Bonds have some advantages
over stock, which include low volatility, high liquidity, legal protection and a variety of term
structures.” (MGMT2023 Unit 4)By investing in these types of investment makes it more
realistic to get her returns monthly for her retirement income.

5)

a) If someone makes money someone else loses it.

This is a popular saying and it is based on a term called a zero-sum game, meaning
that the same amount of money lost in one area is gained in another, which equates to
0. Therefore, this statement is true. A clear example of this would be someone at a
casino placing a bet, if they win the casino loses money but if he loses the casino gains
money.
 b)Investing is nothing more that Gambling
Definition of investments states to put money into something which offers
profitable returns. According to Investopedia.com “An investment is an asset or item
that is purchased with the hope that it will generate income or appreciate in the
future. In an economic sense, an investment is the purchase of goods that are not
consumed today but are used in the future to create wealth. In finance, an investment
is a monetary asset purchased with the idea that the asset will provide income in the
future or will later be sold at a higher price for a profit.” (investopedia.com)There are
also various risk appetites in investing some are positive and some are negative.
However, with gambling there is high uncertainty and it is based on chance. The
probability that one wins or loses is based solely on chance.
In investing, this can be calculated in advance, particularly for a risk averse appetite,
e.g. fixed payment notes or bonds. Therefore the statement is false

c)The stock market will always go up

The stock market depends highly on economic factors and consumers

taste. Therefore, it is false to state that the stock market will always go up
because there are both positive and negative factors that may affect the
stock prices causing stock in the market to fluctuate. According to
MGMT2023 Unit 1 “The New York Stock Exchange (NYSE) is an example of
an organized exchange. The existence of computers and modern
telecommunications networks within the platform of the organized
exchanges, cause new information to hit the market almost
instantaneously and continuously. This causes frequent and sometimes
large changes in stock prices and brings equilibrium to the stock prices
where required and expected returns are generally equal. While there are
times when stocks appear to react to several months of favorable or
unfavorable developments, this does not signify a long adjustment period,
rather it simply indicates that as more new pieces of information about the
situation become available, the market adjusts to them.” (MGMT2023 Unit
1) This signifies that there are periods when the stock market is up and
others when they are low. As a result to state that the stock market will
c always go up would be false.

Section 2

Question 1
 Fixed costs
Cost of project 15,000,000
5 year life - straight line
(annual depreciation) 3,000,000

(to be recovered in the last

Working captial investment 1,500,000 year of the project)

Variable revenues & costs

Expected
Project No revenue Expenses
70% of
new boxes for VIP 4 1,202,000 (incremental annual) revenues
70% of
Seats for gen public 4000 10,000,000 (incremental annual) revenues

A Year 0 Year 1 Year 2 year 3 Year 4 Year 5

Capital expenses (15,000,000)
Working capital (1,500,000)
Revenue 11,202,000 11,202,000 11,202,000 11,202,000
11,202,000
Operating expenses (7,841,400) (7,841,400) (7,841,400) (7,841,400)
(7,841,400)
EBITDA (16,500,000) 3,360,600 3,360,600 3,360,600 3,360,600 3,360,600
D&A (3,000,000) (3,000,000) (3,000,000) (3,000,000)
(3,000,000)
EBIT (16,500,000) 360,600 360,600 360,600 360,600 360,600
Tax @15% 54,090 54,090 54,090 54,090 54,090
Net income (14,967,450) 306,510 306,510 306,510 306,510 306,510
D&A 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
Cash flow from operations 3,306,510 3,306,510 3,306,510 3,306,510 3,306,510
Working capital 1,500,000
Free Cash Flows (16,500,000) 3,306,510 3,306,510 3,306,510 3,306,510 4,806,510 1,532,550
Pv DF @15% 1.00 0.8696 0.7561 0.6575 0.5718 0.4972
B PV cash Flows (16,500,000) 2,875,226 2,500,197 2,174,084 1,890,508 2,389,685
NPV (4,670,295)
C IRR
PV @ 6% (16,500,000) 3,119,349 2,942,782 2,776,210 2,619,066 3,591,704
NPV (1,450,890)

IRR = 2.873%

D WACC

FV 1000
PV (-92% X 100) -970
N 7
(.07% x
PMT 1000) 70
CPT I/Y 8.57%
After tax KD 7.28%

Cost of equity 8.40%

Cost X
Market Value weight cost weight
(.92%x 1000
X5000 ) 4600000 0.9228 7.28% 6.72%
Market Value of equity
(3.85% X
1000 ) 385000 0.0772 8.40% 0.65%
Total Market Value 4985000 1.00
WACC 7.37%
b) Net present value is negative thus we need to reject this project because it generates a negative net cash flow.

c) IRR = 2.9873% we should not accept as it is less than the expected 15%

Revenue

New Box (4x $300,500) 1,202,000

Additional seats (400 x $2500) 10,000,000
11,202,000
Operating expenses 70% x 11 2020,000 7,841,400

D & A 15,000,000/5 3,000,000

d) WACC = 7.37%
Reference:

Investopedia.com. Investment. Retrieved on April 4thnd,2018 from

https://www.investopedia.com/terms/i/investment.asp#ixzz5C2Pb4jjI

MGMT2023. Unit 4 -Bonds .Retrieved on APRIL 4Th ,2018 from

http://2017.tle.courses.open.uwi.edu/pluginfile.php/112491/mod_resource/content/3/M
GMT%202023%20_U4_Version1_new.pdf

MGMT2023. Unit 1-Introduction to Corporate Finance. Retrieved on April 4th, 2018

from
http://2017.tle.courses.open.uwi.edu/pluginfile.php/112461/mod_resource/content/5/M
GMT2023%20UNIT%201%20-%20Version%201.pdf

MGMT2023. Unit 7 - Capital Budgeting. Retrieved on April 4th, 2018 from

http://2017.tle.courses.open.uwi.edu/pluginfile.php/112517/mod_resource/content/3/M
GMT%202023%20_U7_Version1_new.pdf

MGMT2023. Unit 8 - Cost of Capital. Retrieved on April 4th ,2018 from

http://2017.tle.courses.open.uwi.edu/pluginfile.php/112525/mod_resource/content/3/M
GMT%202023%20_U8_Version1_new.pdf