Financial Risk and Analysis Business Factors

Question: Describe about the Financial Risk and Analysis for Business Factors. Answer: Introduction This assignment is conduct the four parts and the each part except the last one is practical. In the part one, there is calculation of the Net present value under different circumstances and in the second question there is calculation of Net present value as well as the Internal rate of return and this question also discuss about the acceptance of the projects. In the third question, there is also the calculation about break-even point and wighted average cost of capital and many more. In the forth question, there is discussion about the sources of risk which affects the financial managers and shareholders (Federation Business School, 2016). year A B C D E F discounted factor@10% 0 -100000 -150000 -60000 -100000 -50000 -100000 1 1 20000 -50000 20000 60000 20000 30000 0.909 2 40000 100000 40000 60000 40000 30000 0.826 3 60000 100000 40000 100000 60000 30000 0.751 4 80000 140000 40000 30000 0.683 Discounted factor=1/(1+r) (Clayton, 2016). 1st year=1/(1+10%)=0.909 2nd year=1/(1+10%)2=0.826 3rd year=1/(1+10%)3=0.751 4th year=1/(1+10%)4=0.683 year 0 1 2 3 4 P.V factor 1 0.909 0.826 0.751 0.683 project NPV P.I Ratio A -100000 18180 33040 45060 54640 50920 0.5092 B -150000 -45450 82600 75100 95620 57870 0.3858 C -60000 18180 33040 30040 21260 0.354333333 D -100000 54540 49560 75100 79200 0.792 E -50000 18180 33040 45060 27320 73600 1.472 F -100000 27270 24780 22530 20490 -4930 P.I ratio=NPV/cash outflow (Wilkinson, 2013). Project A=50920/100000=0.5092 Project B=57870/150000=0.3858 Project C=21260/60000=0.3543 Project D=79200/100000=0.792 Project E=73600/50000=1.472 Case1. fractions of investment can be undertaken. I.e. they are divisible. In this case, firm can take those projects whose limit upto $300000 and the fraction of the investment can be taken. So, the firm has take the project on the basis of the P.I ratio. Thus, the P.I ratio of project E and D is highest and thus,the firm will take both the projects and A also and from B, the firm will take only $50000 whose NPV is $19,290. Thus the firm will aqcquired E, D, A and B. Total NPV of these projects= 73600+79200+50920+19290=$223010 Case2. Fraction of the investment cannot be undertaken In this case, firm will take the project D, E and B because their NPV is highest. This decision have been taken by the firm on the basis of NPV of the projects. Total NPV of projects D, E and B=79200+73600+57870=210670 Case3. Projects AE are mutually exclusive. In this case, the firm will make the combination of the projects according to their highest NPV. combination NPV DE 152800 BD 137070 BE 131470 BC 79130 AD 130120 AB 108790 AC 72180 CD 100460 CE 94860 B,DE 210670 C,DE 174060 B, D E will be acquired as their NPV is highest. Total NPV of this projects= $210670 ANS2) year 0 1 2 3 4 5 NPV total of P.V A -100000 30000 35000 40000 45000 55000 B -140000 53000 53000 53000 53000 53000 discounted factor @10% 1 0.909 0.826 0.751 0.683 0.621 P.V @ 10% of A -100000 27270 28910 30040 30735 34155 51110 151110 P.V @ 10% of B -140000 48177 43778 39803 36199 32913 60870 200870 discounted factor @ 20% 1 0.834 0.694 0.578 0.482 0.402 P.V of A @ 20 % -100000 25020 24290 23120 21690 22110 116230 P.V of B @ 20% -140000 44202 36782 30634 25546 21306 158470 Discounted factor @ 20 %=1/(1+r)n (Clayton,2016). 1st year=1/(1+20%)1=0.834 2nd year=1/(1+20%)2=0.694 3rd year=1/(1+20%)3=0.578 4th year=1/(1+20%)4=0.482 5th year=1/(1+20%)5=0.402 IRR of project A= lowest discount rate+[highest present value of / highest present value -lowest present value ]*(highest discount rate-lowest discount rate) (Accounting Simplified, 2013). 10+[151110/151110-116230]*(20-10)= 33.3% IRR of project B= 10+[200870/200870-158470]*(20-10)=57.3% Black Ltd will prefer project B as the net present value and internal rate of return is high as compared to project A. ANS3) souce of capital range of new financing breaking point range of total new financing long term debt 0-300000 344827.5862 0-344827.5862 300001-600000 689655.1724 344828-689655.1724 600001-above above 689655.1724 preference share 0-100000 1428571.429 0-1428571.429 100001-above above 1428571.1724 ordinary share 0-500001 25000050 0-25000050 500001-1000000 50000000 25000051-50000000 1000001-above above50000000 proportion WCC WACC WMCC COST Cost*proportion IN % 0.87 5.655 6.5 6.525 7.5 7.83 20.01 2001.00% 9 0.07 0.665 9.5 0.7 9.195 919.50% 10 0.02 0.22 11 0.25 12.5 0.28 0.75 75.00% 14 intial investment cash flows NPV A 200000 68641 131359 B 300000 72967 227033 C 500000 97161 402839 D 300000 120635 179365 E 600000 154254 445746 F 100000 19207 80793 Investment E will be accepted . ANS4) In most cases, the reason behind the financal loss are risks. The assets which have more risk, the probability for the loss of that assets are also high, as compared to those assets which have less risk. Thus, risk refers to that chances of loss for return which is associated with the given assets. Souces of risk which affects the financial managers and shareholders It is distinct into three categories: Firm-specific risk: Business risk In this risk, there is probability that the firm does not manage the operating cost. Firms runs the level of the stability of the revenue and operating cost structure. Financial risk There is probability in which the firm does not pay the money to another party. Firms runs the level of the operating cash flows and the fixed cost paid to the other party. Shareholder-specific risk: Interest rate risk When there is change in the interest rate and that changes has the impact on the price of the investment. The probability of that risk is the interest rate risk. The values of the various investment falls, when there is increase in the interest rate and rise the value of investment when the interest rate decreases. Liquidity risk That probability in which investment does not convert into cash easily at a good price is the liquidity risk. Size and depth of the market affects the liquidity in which they do the trading of the investment. Market risk That probability in which the price of the investment will fall due to the factors of the market is called market risk. If the investment value reacts high on the market then the risk will be high and if reacts low then the risk will be low. Firms and shareholders risks: Event risk That risk which is not expected and affects the firms value and investment like government rules on the particular drug which is generally affects those firms and investment which belongs to the small group is the event risk. Exchange rate risks When the expected cash flow of the future is fluctuate according to the currency exchange rate is the exchange rate risk. Higher the fluctuations in the exchange rate, higher will be the risk on the cash flows and thus the firms investment will be low. Purchasing-power risk When the price levels changes due to inflation or deflation came into the economy which will affect the cash flows and the value of the investment is known as purchasing-power risk. When the level of the general price on which the cash flows moves have less purchasing power risk and that investments which does not move with that level has more purchasing-power risk. Tax-risk The probability occurs when there ie unconditional change in the laws of tax is the tax-risk. The price of the investment which is related to the changes of the tax has high risk(Eshna, 2012). References Eshna. (2012). financial risk and its types. Retrieved from https://www.simplilearn.com/financial-risk-and-types-rar131-article/all-resources Clayton,J. (2016). how to calcualte discounted factor for a company. Retrieved from https://smallbusiness.chron.com/calculate-discount-factor-company-21593.html Wilkinson,J. (2013). profitability index method formula. Retrieved from https://strategiccfo.com/profitability-index-method-formula/ Accounting Simplified.com. (2013). internal rate of return. Retrieved from https://accounting-simplified.com/management/investment-appraisal/internal-rate-of-return-irr.html Federation Business school. (2016). financial management. Retrieved from file:///C:/Users/Guest/Downloads/933798_1734034586_932973_1567606680_Assignment2-%20(3).pdf