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Financial Management Assignment - Investment advice

Instructions

BBA-2018- Introduction to Financial Management Assignment-1                    [Max. Marks 40] 1.   Assignment 1 comprises of 3 Mini Cases. All cases are compulsory
2.   You are required to submit two documents: (1) word document and (2) an excel document (All your workings should be done in the excel file)
3.   The submission is due by 15th May 2020 11:59 PM (Midnight)
4.   Rules for the bonus mark:
a.   If you make a submission before 13th May 2020 11:59 PM, you will be rewarded with a 10% bonus marks on the total marks obtained in the assignment.
b.  If you make a submission before 14th May 2020 11:59 PM, you will be
rewarded with a 5% bonus marks on the total marks obtained in the assignment
c.   In all cases, total marks obtained (including bonus marks) will not exceed
40
5.   JGU rules regarding online examination shall apply
Mini Case - 1                                                                                                  [Max. Marks 15]

After completing your education, you joined as an investment advisor in Sahyog Capital Ltd, one of the renowned limited liability partnership firms. Your job profile includes providing investment advice to individuals and corporates.

You have been approached by Mr. Hasmukh bhai, he wants some help on investment related matters.Mr. Hasmukh bhai is currently 45 years old. He plans to work for 15 more years and retire at the age of 60.

His present income is INR 4,50,000 per year. He expects his income to increase at the rate of 12 % p.a. until his retirement.Once he retires at the age of 60 years, he would like to withdraw INR 5,50,000 p.a. from his investment for the following 15 years (as he expects to live up to the age of 75 years).

He also wants to bequeath INR 10,00,000 to his only son at the end of his life.

1)  How much money would he need 15 years from now?                                  [3 Marks]

2)  How much should he save each year for the next 15 years to be able to meet his investment objectives spelt out above?                                                           [4 Marks]Mr. Hasmukh bhai wants to donate INR 2,00,000 each year in the last three years of his life to the orphanage home. Each donation would be made at the end of the year.

3)  How much money does he needs when he reaches the age of 60 years to meet this specific donation need?                                                                                   [4 Marks]Mr.

Hasmukh bhai attended a seminar on human capital where the speaker talked about a person’s human capital as the present value of his lifetime earnings. Mr. Hasmukh bhai is curious to find out the present value of his lifetime salary.

For the sake of simplicity assume his present salary is INR 4,50,000 will be paid exactly one year from now (i.e. when he is 46 years old), and his salary will be paid in annual instalments.

Remember that Mr Hasmukh bhai expects his salary to increase at the rate of 12% p.a. until his retirement.4)  What is the present value of his lifetime salary?                                            [4 Marks]In this entire case assume inflow/outflow of income is happening at the end of the year. The discount rate is 10%. Also, ignore any tax factor.

Mini Case – 2                                                                                                 [Max. Marks 10]You have recently graduated from Jindal Global University and joined an investment advisory firm as a financial analyst. Your job is to create a portfolio of bonds and shares for the clients.

Mr. Dhananjay, a prospective client, seeks your help in deciding whether he should buy both the shares and bonds or only shares or only bonds? In essence, you have to make a portfolio of profitable securities for Mr. Dhananjay out of the following investment options:

1)  Perpetual Bond worth INR 1000 is currently selling for INR 950. The coupon rate of interest is 15% and the appropriate discount rate is 14%.                                     [5 Marks]

2)  The share of ABC Ltd. is currently selling in the share market at INR 80 per share. The
company paid a dividend of INR 4 in the previous year. The dividend in the future is expected to grow perpetually at a rate of 6%. The market capitalises dividend at a rate of
11%. A couple of years back (in the 1990s) ABC Ltd. earnings and dividends were growing @18% p.a.

This growth rate was maintained for a few years. This super normal growth has positively impacted the share prices and helped to create a positive image for ABC Ltd. among the investors.                                                                 [5 Marks]

Assume there is no transaction cost.
Mini Case – 3                                                                                                 [Max. Marks 15]

You have been working as a financial analyst for a reputed company. One of the partners of the company wants his son Mr. Aman to be involved in the finance division.

His son will be working together with you. You have been provided with the task to evaluate the investment proposals. There are three investment projects, X, Y, and Z all of the three projects are mutually exclusive.Year 0 1 2 3
Project X (INR) (15,000) 11,000 7,000 4,800
Project Y (INR) (15,000) 3,500 8,000 13,000
Project Z (INR) (15,000) 42,000 (4,000) -
Mr. Aman feels that the investment proposal X and Y are the same in terms of investment required. He also feels that Project Z gives us the maximum cash flow.

Because of the limited understanding of capital budgeting techniques Mr. Aman is unable to identify the most feasible investment proposal.
You are required to make Mr. Aman understand:

1)  How investment projects are evaluated. What are the various methods which we can use to evaluate any investment project? What are the factors we should consider while evaluating any investment proposal?                                                                    [5 Marks]

2)  How to evaluate projects(X, Y, Z) considering all the discounted cash flow techniques and the payback period. You believe that all three projects have similar risk characteristics and a discount rate of 10% can be applied to all of the projects. Given that all the three projects are mutually exclusive which project should you select and why?
[5 Marks]

3)  How can we rate the project if discount rates are, 8%, 9%, and 12%? Compare it with
IRR of the respective projects.                                                                              [5 Marks]

Financial Management Assignment - Investment advice

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