1)
Analysis of five basic principles of finance:
Define the five basic principles finance and justify your analysis by illustrating examples: Choose one or more events described by media (CNN Business, Financial Times, Dow Jones financial news etc.) about companies and financial market. Analyse that event (s) applying the five basis principles of finance. Note: Each principle is to be illustrated by at least one event.
The events should be in 2020.
Example of an event in media that reflect one of five basic principle of finance:
“
The biotechnology company Moderna said Tuesday that its vaccine, developed in partnership with the National Institutes of Health, has been found to induce immune responses in all of the volunteers who received it in a Phase 1 study. Moderna coronavirus vaccine shows 'promising' safety and immune response results in published Phase 1 study, but more research is needed The early results are the first for a US vaccine candidate to be published in a peer-reviewed medical journal, in this case the New England Journal of Medicine. The news sent shares of Moderna skyrocketing nearly 18% in premarket trading. Later this month, the company is expected to begin a large Phase 3 trial, the final stage before regulators decide whether to approve the vaccine.”
Source:
Julia H. 2020,
The world loves the US dollar. Trump and the pandemic could change that, published July 15, 2020 at CNN Business, retrieved from https://edition.cnn.com/2020/07/15/investing/premarket-stocks-trading/index.html
This article paragraph clearly shows the principle:
Market price reflects information. Please note that this is just an example of relevant event on media for your analysis. To meet the requirement of this assignment question, you will need to analyse your selected event and justify why and how a basis principle of finance apply to that event.
2)
Perform a scenario analysis on the data provided
Case Study:
Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product that is expected to sell for an average price of $22 per unit and the company expects it can sell 650 000 unit per year at this price for a period of 4 years. Launching this project will require purchase of a $3 500 000 equipment that has residual value in four years of $500 000 and adding $ 850 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below:
Depreciation method:
straight line
Variable cost per unit: $17
Cash fixed costs per year:
$450 000
Discount rate:
10%
Tax Rate:
30%
Do a scenario analysis with cash flows of the assumed project to determine the sensitivity of the project’s NPV to different scenarios that are defined in terms of the estimated values for each of the project’s value drivers. Please work on two scenarios corresponding to the
worst- and best-case outcomes
for the project. You need to provide your results in (a) relevant tables:
Worst case:
Unit sales decrease by 20%; price per unit decreases by 20%; variable cost per unit increases by 20 %; cash fixed cost per year increases by $100 000
Best case:
Unit sales increase by 20%; price per unit increases by 20%; variable cost per unit decreases by 20%; cash fixed cost per year decreases by $100 000
Based on the scenario analysis outcome, draw relevant conclusion about project NPV’s sensitivity.
Perform an NPV break-even analysis
Perform an NPV break even analysis for the case where price per unit decreases by 20 % to identify the number of unit sales that is needed for the project to get break-even.
Trial and error method or What – If Analysis with excel spread sheet is to be used.