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Part A: Flight Centre and Webjet Share Price
Question 1
a) Price of Ordinary Shares
As of 29th November 2022, the price of ordinary shares of Flight Centre is being numerically expressed as AUD 15.94 per share (au.finance.yahoo.com, 2022). Similarly, the price of ordinary shares for the company concerned Webjet Plc as of 29th November 2022 is numerically expressed as AUD 6.30 per share (au.finance.yahoo.com, 2022).
Figure 1: Graphical Plotting of Each Series
(Source: Created by Learner)
As per the above graphical demonstration of each series, it can be ascertained that the adjusted closing prices of shares for Flight Centre and Webjet have been considered for five years. Therefore, it can be witnessed that share prices during the initial years of 2017, 2018 and 2019 have been much higher as compared to 2020 and 2021. Thus, the evolution of share prices for both companies has affected adversely where the salient point or cause is deemed to be associated with the onset of the covid-19 pandemic. The pandemic has led to strict curbs being imposed on the aviation industry leading to minuscule revenues and a high share of losses (Dunz et al. 2021). The further impact can be witnessed in Webjet as compared to Flight Centre as its share pricing and investor orientation prospects have taken a large toll. Following is a detailed discussion of systematic and unsystematic risks associated with both companies.
b) Systematic and Unsystematic Risk
The relevance and significance of systematic and unsystematic risks are deemed to be an influential facets which can be further identified based on two key factors. As per the narrations and explanations of Hanesti (2018), the factors of systematic risks are considered to be economic-oriented risks which mainly consist of inflation and geopolitical complexities. Moreover, the unsystematic risks are further considered to be issues with business models being implemented and inefficiency of management. Thus, from the above graphical plotting, it can be ascertained that Flightcentre is mostly a victim of systematic risks as the pandemic led to large economic implications of inflated fuel prices and operational costs.
Webjet Plc. can be further considered a victim of unsystematic risk owing to low share prices obtained due to operational inefficiency. As per recent or last six months' trend, the volatility of Flight Centre is deemed to be higher than Webjet as high adjusted closing price fluctuations can be witnessed during this period. However, the prospects of generating incremental investor orientation can also be found in Flight Centre as compared to Webjet which could potentially create high share purchases in the near and distant future.
Part B: Corporate Finance
Question 1
a) Future Value
|
Particulars |
Total |
|
Present Value |
$ 1,200.00 |
|
Interest Rate |
6% |
|
Time (Years) |
3 |
|
Future Value |
$1,429.22 |
Table 1: Calculation of Future Value
(Source: Created by Learner)
As per the above table of calculations, the future value of the investment has been calculated as $ 1429.22. The compounding method of calculation has been further encouraged for finding the values of future values.
b) Effective Annual Rate
|
Particulars |
Total |
|
Present Value |
$ 1,200.00 |
|
Interest Rate |
6% |
|
Time (Years) |
3 |
|
Future Value |
$1,429.22 |
|
Effective Annual Rate |
12.48% |
Table 2: Calculation of Effective Annual Rate
(Source: Created by Learner)
As per the above table of effective annual rate calculations, the numerical expression of EAR is considered to be 12.48%. In order to calculate the numerical expression of EAR nominal interest rate and compounding period have been prioritised.
c) Present Value of an annuity
|
Particulars |
Total |
|
Compounding Pattern (Months) |
2 |
|
Total Years |
12 |
|
Total Compounding Period |
24 |
|
Payments received (Principal Value) |
$ 6,360.00 |
|
Discount Rate |
5% |
|
Present Value of Annuity |
$ 10,848.68 |
Table 3: Calculation of Present value of Annuity
(Source: Created by Learner)
As per the above table of present value of annuity calculations, the numerical expressions of present value of the annuity consist of $ 10,848.68. Compounding method has been further encouraged for the calculation of the present value of an annuity.
d) Annual Interest Rate
|
Particulars |
Total |
|
Principal Deposit Value |
$ 100.00 |
|
Time in Years |
9 |
|
Future Value |
$ 183.85 |
|
Annual Rate of Interest |
7.00% |
Table 4: Calculation of Annual Rate of Interest
(Source: Created by Learner)
As per the above table of an annual rate of interest calculation, the formula considered is deemed to be proportioning the future value of the investment with the principal value of an investment. The resulting numerical expression for an annual rate of interest has been calculated as 7%.
e) Approximate Real Interest Rate
|
Particulars |
Total |
|
Nominal Interest Rate |
11% |
|
Inflation |
8% |
|
Real Interest Rate |
3% |
Table 5: Calculation of Real Interest Rate
(Source: Created by Learner)
As per the above table of real interest rate calculation, it can be ascertained that the real interest rate has been calculated as 3%. In order to calculate the real interest rate, the formula applied for calculation consists of subtracting expected inflation from the nominal interest rate.
Question 2
a) Acceptance of Project Based on Payback Period
|
Project C |
||
|
Years |
Cash Flows |
Cumulative Cash Flows |
|
0 |
$ -20,000.00 |
$ -20,000.00 |
|
1 |
$ 4,000.00 |
$ -16,000.00 |
|
2 |
$ 6,000.00 |
$ -10,000.00 |
|
3 |
$ 5,000.00 |
$ -5,000.00 |
|
4 |
$ 4,000.00 |
$ -1,000.00 |
|
5 |
$ 6,000.00 |
$ 5,000.00 |
|
6 |
$ 2,000.00 |
$ 7,000.00 |
|
7 |
$ 2,000.00 |
$ 9,000.00 |
|
8 |
$ 2,000.00 |
$ 11,000.00 |
|
Payback Period (Years) |
5.83 |
|
Table 6: Calculation of Payback Period for Project C
(Source: Created by Learner)
As per the above table of payback period calculations for project C, it is expected that the project will recover its initial cost of investment in 5.83 or 5 years and 10 months. As the ideal benchmark of selecting a project based on payback period is mentioned as 4 years, this project fails to meet the desired criteria. Hence, Project C is needed to be rejected by the concerned organisation owing to higher payback period propositions.
|
Project D |
||
|
Years |
Cash Flows |
Cumulative Cash Flows |
|
0 |
$ -20,000.00 |
$ -20,000.00 |
|
1 |
$ 8,000.00 |
$ -12,000.00 |
|
2 |
$ 6,000.00 |
$ -6,000.00 |
|
3 |
$ 6,000.00 |
$ - |
|
4 |
$ 1,000.00 |
$ 1,000.00 |
|
5 |
$ 3,000.00 |
$ 4,000.00 |
|
6 |
$ 4,000.00 |
$ 8,000.00 |
|
Payback Period (Years) |
3.00 |
|
Table 7: Calculation of Payback Period for Project D
(Source: Created by Learner)
As per the above table of payback period calculation for Project D, the payback period has been numerically calculated as 3 years. Hence, the stipulated benchmark and criteria for selecting a project based on the payback period is considered to be 4 years. Therefore, Project D meets all relevant criteria needed to justify selection based on the Payback period. Thus, Project D is needed to be selected by the concerned organisational spearhead as the time needed to recover initial costs of investments and capital costs is considerably lower than Project C. As per illustrations and opinions of Hatipoglu et al. (2022), the lower payback period of a project also encourages the management of the concerned organisation to ensure that higher revenue and cash flow generation prospects could be identified and materialised. Thus, chances of maximising competitiveness and accomplishment of project objectives could be catapulted owing to a faster payback period for a particular project.
b) Acceptance of Project Based on NPV
|
Project C |
|||
|
Years |
Cash Flows |
Discounting Rate @ 12% |
Discounted Cash Flows |
|
0 |
$ -20,000.00 |
1.00 |
$ -20,000.00 |
|
1 |
$ 4,000.00 |
0.89 |
$ 3,571.43 |
|
2 |
$ 6,000.00 |
0.80 |
$ 4,783.16 |
|
3 |
$ 5,000.00 |
0.71 |
$ 3,558.90 |
|
4 |
$ 4,000.00 |
0.64 |
$ 2,542.07 |
|
5 |
$ 6,000.00 |
0.57 |
$ 3,404.56 |
|
6 |
$ 2,000.00 |
0.51 |
$ 1,013.26 |
|
7 |
$ 2,000.00 |
0.45 |
$ 904.70 |
|
8 |
$ 2,000.00 |
0.40 |
$ 807.77 |
|
Net Present Value |
$ 585.85 |
||
Table 8: Calculation of Net Present Value for Project C
(Source: Created by Learner)
As per the above table of calculations for computing the Net Present Value for Project C, it can be ascertained that the numerical expression of NPV has been calculated as $ 585.85. The projected lifespan considered for the calculation of NPV for Project C is considered to be 8 years. Thus, positive NPV numbers are a vital marker that allows organisations the selection or rejection of a project. Hence, the concerned management of the associated organisation can select Project C owing to positive NPV readings. The calculation of NPV has also factored in the cost of capital or the required rate of returns, which has been considered 12% for the calculations.
|
Project D |
|||
|
Years |
Cash Flows |
Discounting Rate @ 12% |
Discounted Cash Flows |
|
0 |
$ -20,000.00 |
1.00 |
$ -20,000.00 |
|
1 |
$ 8,000.00 |
0.89 |
$ 7,142.86 |
|
2 |
$ 6,000.00 |
0.80 |
$ 4,783.16 |
|
3 |
$ 6,000.00 |
0.71 |
$ 4,270.68 |
|
4 |
$ 1,000.00 |
0.64 |
$ 635.52 |
|
5 |
$ 3,000.00 |
0.57 |
$ 1,702.28 |
|
6 |
$ 4,000.00 |
0.51 |
$ 2,026.52 |
|
Net Present Value |
$ 561.03 |
||
Table 9: Calculation of Net Present Value for Project D
(Source: Created by Learner)
As per the above table of net present value for Project D, the net present value has been calculated as $ 561.03. The calculations have been considered based on estimating a project life span of six years for Project D. Hence, the criteria applicable for the selection of a project by the management of the organisation is considered to be associated with estimating positive NPV for a project. Thus, this project can also be selected by the concerned management of the organisation concerning ascertaining growth and development of financial aesthetics. However, the NPV of Project C is considered to be slightly higher than Project D. Hence, if initial costs are not a constraint, both mutually exclusive projects can be selected by the concerned management of the organisation to multiply financial security and financial reserves. Miller (2021), stated and explained that better NPV propositions for an organisation lead to higher profit-seeking prospects which could be utilised to generate organisational growth and prosperity.
c) Acceptance of Project Based on Equivalent Annual Annuity Technique
|
Project C |
|
|
Particulars |
Total |
|
NPV |
$ 585.85 |
|
Discounting Rate |
12.00% |
|
Life of Project (years) |
8 |
|
EAA |
$ 117.93 |
Table 10: Expected Annual Annuity for Project C
(Source: Created by Learner)
As per the above table of Expected Annual Annuity for Project C, the numerical expression of EAA has been calculated as $ 117.93. In order to calculate the EAA for Project C, it can be ascertained that a project lifespan of 8 years has been considered, while the NPV value of $ 585.85 has been considered for Project C. Formula applied for calculation of EAA is considered to be associated with integrating project life, discounting rate as well as NPV. Since EAA of the Project is positive this project could be accepted by the management of the organisation.
|
Project D |
|
|
Particulars |
Total |
|
NPV |
$ 561.03 |
|
Discounting Rate |
12.00% |
|
Life of Project (years) |
6 |
|
EAA |
$ 136.46 |
Table 11: Expected Annual Annuity for Project D
(Source: Created by Learner)
As per the above table of EAA calculations for Project D, the EAA has been calculated as $ 136.46 by considering discounting rates, life of project as six years and an NPV value of $ 561.03. Thus, it could be ascertained that this project can also be selected owing to positive EAA numbers and greater aesthetics as compared to Project C. However, if costs are not a constraint, the organisation can also consider selecting both projects.
Question 3
a) Holding-Period return of investment
|
Particulars |
Total |
|
Rental Income Received |
$ 12,000.00 |
|
Value of Property at Beginning of Year |
$ 3,50,000.00 |
|
Value of Property at the end of Year |
$ 4,00,000.00 |
|
Holding Period Return on Investment |
17.71% |
Table 12: Calculation of Holding Period Return on Investment
(Source: Created by Learner)
b) Valuation of Huawei’s shares
|
Particulars |
Total |
|
Dividend Per Share |
$ 0.90 |
|
Required Rate of Return |
15.00% |
|
Dividend Growth Rate |
10.00% |
|
Value of Huawei’s Shares considering DDM |
$ 18.00 |
Table 13: Calculation of Valuation of Huawei’s Shares
(Source: Created by Learner)
c) Required Rate of Return
|
Particulars |
Total |
|
Treasury Bond Rate (Risk-Free Rate) |
3.00% |
|
All Ords Index (Market-Risk Premium) |
12.00% |
|
Beta |
1.2 |
|
Required Rate of Return Using CAPM |
13.80% |
Table 14: Calculation of Required Rate of Return
(Source: Created by Learner)
Question 4; Discussion on preference of IRR and discounted payback model over NPV
Capital budgeting techniques are often considered to be important metrics under the financial structure of an organisation which is mostly connected with implementation and initiation of a new project. As idealised and opined by Monsiváis (2021), various capital budgeting techniques mainly consist of NPV, IRR, payback and discounted payback methods. In most cases, priority of project selection is offered based on the NPV appraisal as it is deemed to be a valuable method which helps ascertain the level of discounted cash flows along with present value appraisal and time value of money. However, in some cases, priority is offered to IRR and discounted payback methods instead of NPV. Following is a detailed reason as to why IRR and discounted payback are offered a detailed degree of importance as compared to NPV analysis.
Difficulty in Ascertaining Discount Rate
The primary reason associated with the selection of IRR and discounted payback over NPV is considered to be related to an organisation having difficulty in ascertaining the discount rate applicable for a project. As per illustrations and explanations of Ranger et al. (2021), difficulty in ascertaining discount rates is also deemed to be a complex situation where an organisation has multiple project options. Hence, in that case, the project containing a better IRR is offered highest priority irrespective of NPV and the payback period. On the other hand, difficulty in ascertaining discount rates also does not prioritise discounted payback periods since ascertaining the discounted years becomes difficult. In that case, a simple payback period is often used to estimate the overall time required for a project to recover its initial capital and investment costs (Sergi et al. 2022).
Large Variations in Cash Flows
The second reason attributed to the prioritised selection of IRR and Discounted payback period over NPV is considered to be related to situations possessing a large variation in cash flows. As per narrations and explanations of Singh et al. (2020), large variations or fluctuations in cash flows are deemed to be a situation highly present in case of multiple projects. Hence, irregular project life spans of projects could also contribute to the variations in cash flows where the NPV method is deemed to be insufficient and inappropriate. Moreover, the additional aspects attributed to the preference for IRR and discounted payback period are considered to be related to finding out which project achieves the fastest payback and which project achieves highest rate of return. Hence, in that case, priority is primarily given to projects having better IRR followed by a better-discounted payback period.
Preference of Selection is provided based on a rate of return
The third reason attributed towards preferring selection of projects on IRR and Discounted Payback period (DPBP) is considered to be related to an organisation wanting to focus on high project returns and faster project payback. As per illustrations and explanations of Tortajada et al. (2021), these cases are generally considered to be rare and further and the main motto of an organisation is mostly associated with implementing a project on a short-term basis. Hence, DPBP preference can also be linked with prioritising short-term project feasibility rather than emphasising long-term project prospects (Richani, 2020).
References
Journals
- Dunz, N., Essenfelder, A.H., Mazzocchetti, A., Monasterolo, I. and Raberto, M., 2021. Compounding COVID-19 and climate risks: The interplay of banks’ lending and government’s policy in the shock recovery. Journal of Banking & Finance, p.106306.
- Hanesti, E.M., 2018. Bagaimana Keuangan Islam Menggunakan Faktor Diskonto dalam Capital Budgeting Decision?. El Dinar, 6(2), pp.83-100.
- Hatipoglu, B., Ertuna, B. and Salman, D., 2022. Small-sized tourism projects in rural areas: The compounding effects on societal wellbeing. Journal of Sustainable Tourism, 30(9), pp.2121-2143.
- Miller, T.A., 2021. How Economic Theory Should Guide What We Measure. In Costs and Returns for Agricultural Commodities (pp. 347-366). CRC Press.
- Monsiváis, C., 2021. Introduction. The Sidelong World Where Confession and Proclamation Are Compounded. In Pillar of Salt (pp. 1-45). University of Texas Press.
- Ranger, N., Mahul, O. and Monasterolo, I., 2021. Managing the financial risks of climate change and pandemics: What we know (and don't know). One Earth, 4(10), pp.1375-1385.
- Richani, N., 2020. Fragmented Hegemony and the Dismantling of the War System in Colombia. Studies in Conflict & Terrorism, 43(4), pp.325-350.
- Sergi, D., Sari, I.U. and Senapati, T., 2022. Extension of capital budgeting techniques using interval-valued Fermatean fuzzy sets. Journal of Intelligent & Fuzzy Systems, (Preprint), pp.1-12.
- Singh, R.K., Singh, A., Kumar, S., Sheoran, P., Sharma, D.K., Stringer, L.C., Quinn, C.H., Kumar, A. and Singh, D., 2020. Perceived climate variability and compounding stressors: Implications for risks to livelihoods of smallholder Indian farmers. Environmental Management, 66(5), pp.826-844.
- Tortajada, C., Koh, R., Bindal, I. and Lim, W.K., 2021. Compounding focusing events as windows of opportunity for flood management policy transitions in Singapore. Journal of Hydrology, 599, p.126345.
Websites
- au.finance.yahoo.com, 2022, Share Prince of Flight Centre [online], Available at: https://au.finance.yahoo.com/quote/FLT.AX/history?period1=1512086400&period2=1669680000&interval=1mo&filter=history&frequency=1mo&includeAdjustedClose=true [Accessed on: 29.11.2022]
- au.finance.yahoo.com, 2022a, Share Prince of Webjet [online], Available at: https://au.finance.yahoo.com/quote/WEB.AX/history?period1=1512086400&period2=1669680000&interval=1mo&filter=history&frequency=1mo&includeAdjustedClose=true [Accessed on: 29.11.2022]
