CORPORATE FINANCIAL STRATEGY

Corporate Financial Strategy



Corporate Financial Strategy

Question # 1

(a) NPV

RF Rate + (Market Return - RF Rate)*Beta

Year

Q

Q

P

P

0

-150000

-150000

1

1800

1200

45000

30000

2

2000

1400

50000

35000

3

2400

1400

60000

35000

4

2800

1600

70000

40000

5

2800

1600

70000

40000

NPV

$145,000.00

$30,000.00

IRR

25%

6%

(b) Standard Deviation of NPV

High Demand

0.6

$145,000.00

87000

Low Demand

0.4

$30,000.00

12000

E (NPV)

99000

NPV Deviation

113907.8575

(c) IRR

1

2

IRR

25%

6%

(d-1) Adjusted risk discount rate

In Portfolio Theory and Capital allowance investigation, the rate necessary to work out the Present worth of an unsure or risky stream of earnings; it is the risk-free rate in addition to a risk premium that is based on an investigation of the risk characteristics of the specific buying into or project. In this scenario, Adjusted risk discount rate is 13.5%

(d-2) Sensitivity analysis

Sensitivity analysis is very helpful when attempting to work out the influence the genuine conclusion of a particular variable will have if it differs from what was before assumed. By conceiving a granted set of scenarios, the analyst can work out how alterations in one variable(s) will impact the target variable.

(d-2) Scenario Analysis

There are numerous different ways to approach scenario analysis, but a common procedure is to work out what the benchmark deviation of every day or monthly security returns are, and then compute what worth would be anticipated for the portfolio if each security developed comes back two or three benchmark deviations above and below the mean return.

Advantages

1) Simple to understand.2) Has a great deal of intuitive appeal for risk averse businessman.3) It incorporates an attitude towards uncertainty.

Disadvantages

1) There is no easy way of deriving a risk-adjusted discount rate.2) It does not make any risk adjustment is numerator for cash flows that are forecast over future years.3) It is based on assumption that investors are risk-averse. Though it is usually factual, there lives a class of risk seekers who do not demand premium for assuming risks, they are eager to pay a premium to take risks. Accordingly, composite discount rate would be decreased, not bigger, as the grade of risk increases.

From the attached excel sheet, we can easily see that the NPV of the project is negative i.e. ($52.15) m. This means that the project should be rejected and discontinued. We have analyzed the given cash flows of the project using technique Net Present Value. The reason for analyzing the capital investment project by NPV is to increase the reliability and authenticity of our forecast. From the following table, we can easily see that Net Present Value of Project is greater than 0. According to the NPV principle, we accept the project having positive value of NPV because higher the NPV, greater would be the returns and profitability of the project.

The target is to sustain a good liquidity position under all circumstances with sufficient account overdrafts, credit facilities and cash in hand. Liquidity management is handled with cash pools in different countries around the world. Excess liquidity is intensified in the treasury unit by using interior account overdrafts and interior borrowing facilities. Excess liquidity is mainly used to decrease short-term interest bearing debt. The residual surplus liquidity is bought into in short-term and liquid cash market instruments in agreement with ...