Brad Co. is evaluating a project with the following cash flows. The firm does not have any debt and all the required financing for the project is through stockholders.

Table 1: Cash flows of the project

Year	Cash flow (£)
0	(45,000)
1	14,000
2	16,000
3	17,000
4	20,000

 

Table 2: Risk and Return

	Expected Return	Standard Deviation	Beta
Brad Co.	16. 30 %	30%	1.3
FTSE 500	13%	12%
Risk Free Asset	2%	0%

 

 

 

 

Using the provided information in Table 2 and assuming that CAPM holds:

1-      Calculate the expected return of the firm.  

 

Using the CAPM model the expected return of the firm is calculated:

Calculation suggests that expected return for Brad Co. is around 16.30%.

2-      Using the estimated expected return, evaluate the project using the following criteria (Table 3) and decide if you accept/reject the project based on each criterion (the last column of Table 3).               

Table 3: Project criteria

Criteria	Value	Managers’ Threshold	Accept/Reject
NPV	0		Reject
IRR	17%		Reject
Payback Period (PB)		2.5 year	Accept
Discounted Payback Period (DPB)		4 year	Accept
Profitability Index (PI)		0.5	Reject

                                                           

3-      Please provide the NPV profile of the project.                                                           (5 marks)

The following graph and table represent the NPV profile of the project.

 

4-      Considering the estimated criteria, provide your insight about this project as an independent analyst.                                                                                     (5 marks)

Based on the calculation of expected return it can be said that the project is beneficial for the company as it can generate a higher return. While the NPV value is “0” that should be greater than “0”. Moreover, the IRR value is 17% as calculated by the use of project cash flows. While an ideal IRR should be between 12 %-15%. Thus, considering this internal rate of the return value is greater than the requirement. Although, the Payback period is short so the project is acceptable. Similarly, the discounted payback period is also less than 5 so it's good it accepts it. Somehow, the probability index is just limited to 0.5 only. It is lower than the lowest acceptable measure of probability index value "1.0".

Question 2                                                                                                          (15 marks)

You work as a financial analyst in Brad Co. Mr John Merton is a new client who is interested to invest for his future. He wants some help in terms of personal financing. He is risk-taker, 35-year-old, and has 25 years to retirement.

a)      Explain to him what are the main processes of personal finance planning?  (5 marks)

The personal finance planning is a process through which a person can manage his money in such a way that return him a better return in future. Any person having extra money as the saving can invest his amount in various investment products and money market opportunities to increase this amount and earn a return on his investment. Keeping money in safe and lockers cannot be double. While a wise investment of this saving can sometimes double it in a short time period. Personal finance planning enables a person to find such attractive opportunities which can be considered as safe investment opportunities with lower risk factor and higher expected return in future.

b)     Considering the characteristics of Mr Merton, what are your suggestion as investments options for investment in the money market and capital market? (10 marks)

Considering the characteristics of Mr Merton I would suggest them to invest money in the money market and capital market instead of keeping it as saving in his locker. Mr Merton is not retired yet, therefore, he still has the opportunity to invest this money in higher return generating investment products even some of these have a higher risk factor.  Following my experience, a  person with a saving of his retirement pension should invest his money in the money market especially banks to have a fixed return or income for daily requirements and expenditures. However, people eager for risky investment and interested in higher return should invest int the capital markets.

  Considering his characteristics I would suggest him to buy shares of a higher return generating company. However, he should also analysis the stock price volatility and previous return calculations before making an investment in any company. Although, rather than investing all amount in a single company he should invest in different companies thus he can diversify risk factor from his investment portfolio.  Moreover,     I would also suggest him to buy some corporate bonds with a higher interest rate and treasury bills with a lower risk factor to have better investment return.

Question 3                                                  
Company1: Merck & Co. Inc.
Company 2: Microchip Technology Incorporated                                   (50 marks)

a)      Collect the weekly share price data (adjusted close) of companies assigned to you and the price data for the S&P500 market index for the period of one year. Calculate the weekly returns and graph the returns of the share prices and the index over the period (assume no dividends). Interpret the graph.