Table of Contents

C1_THE ROLE OF FINANCIAL MANAGEMENT C2_ THE TAX ENVIRONMENT C11_ CAPITAL BUDGETING: CONCEPTS AND METHODS C13_RISK IN CAPITAL BUDGETING C4_THE TIME VALUE OF MONEY C9_RISK AND RATES OF RETURN C14_COST OF CAPITAL C16_CAPITAL-STRUCTURE POLICY C17_DIVIDEND POLICY AND INTERNAL FINANCING C19_SHARES AND CONVERTIBLE SECURITIES

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C1_THE ROLE OF FINANCIAL MANAGEMENT

What is financial management? 1. Long-term investments that the firm undertaken is capital budgeting. 2. The firm raises money to fund these investments referring to as capital structure. 3. The firm best manage its cash flow as they arise in its day to day operations referring to as working-capital management.

Board of Directors

Chief executive Officer (CEO)

Chief Financial Officer (CFO) Marketing Manager - Oversee financial planning; - Company strategic planning; - Control company cash flow. Operations Manager

Treasurer Cash management Credit management Capital expenditures Raising capital Financial planning Management of foreign currencies Financial Controller Taxes
Financial statements

Cost accounting
Data processing

The goal of the financial manager Making investment decisions (capital budgeting decisions)

Making decisions on how to finance these investments (capital structure decisions) Managing funding for the companys day to day operations (working -capital management)

C2_ THE TAX ENVIRONMENT

Taxable income = assessable income allowable deductions 2.1 Calculation of taxable income: individual Jane Piper $ Assessable income Gross wages Less: Allowable deductions Purchase clothing and boots Replacement of tools Taxable income Jane Piper 250 250 500 $44500 45000 $

2.2 Calculation of taxable income: business J & S Plumbing $ Assessable income Sales Less: Allowable deductions Cost of materials used Operating expenses Apprentice wages Machinery and vehicle depreciation Other expenses Financial expenses Interest Taxable income J & s plumbing 20000 $350000 $250000 45000 15000 40000 100000 230000 $600000 $ $

2.3 Calculation of income tax payable for an individual taxpayer: Jan Piper Taxable income 0 6000 6001 37000 37001 44500 Total Tax to be paid on $ 6000 31000 7500 $44500 Tax rate % 0 15 30 Tax payable $ Nil 4650 2250 ($6900) After tax income $

$37600

Australian income-tax rates for resident taxpayers Each dollar of taxable income in range 0 6000 6001 37000 37001 80000 80001 180000 180001 and above Taxed at 0% 15% 30% 37% 45%

2.4 Calculation of income tax payable for a business partnership: J & S Plumping John: Taxable income $225000 Taxable income 0 180000 180001 225000 Total Tax to be paid on $ 180000 45000 225000 Tax rate % Various (30) 45 Tax payable $ 54550 20250 (74800) $150200 After tax income $

Sue: Taxable income $25000 Taxable income Tax to be paid on Tax rate % Tax payable $ $ 0 6000 6000 0 Nil 6001 25000 19000 15 2850 Total $25000 (2850) 2.5 Calculation of income tax payable for a company: J & S Plumbing Limited Taxable income - Company tax @ 30% Net income after tax $ 250000 (75000) 175000 After tax income $ $22150

Tax saving = charge in taxable income x marginal tax rate

2.6 Income tax payable under classical tax system J & S Plumping Limited net income after tax: $250000 - $75000 = $175000 John: 90% $157500 Sue: 10% $17500 Total 100% $175000 Dividend income Income tax After tax income John 157500 (46225) 111275 Sue 17500 (1725) 15775 Total 175000 (47950) 127050

Dividend imputation system refers to the tax system applying a company and shareholders that net income of the company is accounted for the shareholders and taxed at the marginal rate. This is because the company income is taxed twice, so the shareholders are considered as credit for the income tax paid by the company. Franking (imputation) credits o Fully franked: an amount of income tax paid by the company that is credited to shareholders when they receive the company dividends. o Unfranked: no income tax is paid by the company o Partially franked Imputation credit = (fully franked dividend x company tax rate)/(1- company tax rate) [each shareholder] Grossed-up dividend amount = dividend + imputation credit Or Grossed-up fully franked dividend = fully franked dividend amount/ (1 company tax rate) 2.7 Calculation of individual tax payable on fully franked dividends SHARHOLDER JOHN SHAREHOLDER SUE Tax Calculate Income Tax Calculate Income Franked dividend $157 500 received Grossed-up $225 000 franked dividend amount Taxable income 225 000 Tax on taxable (74 800) income * Less: Imputation 67 500 credit Tax (7 300) (payable)/refund After tax income 150 200 *: calculated at marginal tax rate **: surplus imputation (franking) credit $17 500 $25 000 25 000 (2850) 7 500 4 650** 22 150

2.8 Unfranked dividend amounts J & S Plumbing Limited Previous taxable income - Investment allowance deduction = Taxable income Tax payable @ 30% Company net income after tax Unfranked dividend paid to: John; 90% Sue: 10% Total

$250 000 ($250 000) 0 0 $250 000 $225 000 $ 25 000 $ 250 000

2.9 Calculation of individual tax payable on unfranked dividends SHAREHOLDER JOHN SHAREHOLDER SUE TAX CAL. INCOME TAX CAL. INCOME Dividend $225000 $25000 received Gross-up $225000 $25000 franked dividend amount Taxable income $225000 $25000 Tax on taxable ($74800) ($2850) income Less: 0 0 Imputation credit Tax payable ($74800) (2850) After tax $150 200 $22150 income 2.10 Partially franked dividend amounts The companys net income before tax: $250000 An investment allowance tax deduction: $100000 Therefore, the companys tax income: $150000 Income taxes: $45000 ($150000 x 30%) Net income after tax: $205000 ($250000 - $45000) DIVIDEND + IMPUTATION CREDIT John: 90% $184500 $40500 Sue: 10% $20500 $4500 Total 205000 $45000

= GROSS-UP DIVIDEND AMOUNT $225000 $25000 $250000

2.11 Calculation of individual tax payable on partially franked dividends SHAREHOLDER JOHN SHAREHOLDER SUE TAX CALC. INCOME TAX CALCUL. INCOME Dividend received $184500 $20500 Gross-up franked $225000 $25000 dividend amount Taxable income $225000 $25000

Individual tax levied Less: Imputation credit Individual tax (payable)/refund After tax incoome

(74800) 40500 ($34300) $150200

(2850) 4500 1650 22150

Integration of the dividend imputation system John Smith: Summary of net income after tax PARNERSHIP FULLY FRANKED 2.4 DIVIDEND 2.7 J & S Plumbing business Business net income -Tax paid by business (company =business net income after tax John Smith Receive 90% share of business net income after tax -Tax paid by John Net income after tax

UNFRANKED DIVIDEND 2.9

PARTIALLY FRANKED DIVIDEND 2.11 $250000 ($45000) $250000 184500

$250000 0 $250000 $225000

$250000 ($75000) $175000 157500

$250000 0 $250000 225000

($74800) $150200

($7300) $150200

($74800) $150200

($34300) $150200

Taxation category 1 Companies with shareholders that are fully or substantially integrated by the dividend imputation system (prepaid personal tax - franking credits) _ companies The amount of income tax paid by the company on its net income is largely irrelevant to the amount of net income after tax of its shareholders. Investment and financing decisions should focus on maximising companys pre-tax net income and cash flows. This is because reducing the amount of income tax paid by the company will not increase the net income after tax of shareholders. Taxation category 2 a) Sole trader b) Partnership c) Companies with shareholders that are not integrated by the dividend imputation system The amount of income tax paid by the company on its net income is largely relevant to the amount of net income after tax of its shareholders.

Investment and financing decisions should focus on maximising companys after-tax net income and cash flows. Reducing the amount of company income tax paid maximise the after-tax net income and cash flows that can be paid to shareholders as a dividend. Taxation category 3 The in-between case companies with shareholders that are part integrated by the dividend imputation system The amount of income tax paid by the company has some effect on the after-tax wealth of its shareholders. Investment and financing decisions should focus on maximising business after-effectivetax income and cash flows. Teff = T(1-u) Where T = the nominal or statutory company income tax rate u= the proportion of the income tax paid by the company that shareholders are effectively able to use to offset their individual income-tax liabilities. Teff = 0.3(1-0.7) = 0.9 (9%) 70% of imputation credits The statutory company income tax rate (T) = 30%

Capital gain: the difference b/w the sale value of the asset and its purchase value Capital loss: the sale value of the asset < its purchase value Concessional discount sets apart a proportion of the net assessable capital gain 2.12 Calculation of capital-gains tax payable by an individual taxpayer Shares: $50000 Shares purchased: $30000 Capital gain: $20000 Concessional discount: 50% => $10000 of the capital gain Marginal tax rate: 45% => $10000 x 0.45 = $4500 The average tax rate on the capital gain ($20000): $4500/$20000 = 22.5% The return that shareholders may obtain from their share investment has two tax aspects: - Taxation of any dividend received - Taxation of any capital gain when the shares are sold Shareholders should know: - The amount of the dividend they received - The amount of the imputation credit associated with the dividend - The amount of the other net income - The marginal tax rate - Whether they had any capital losses available to offset any assessable capital gain. 2.13 Calculation of after-tax rates of return TAX CALC. Fully franked dividend received

INCOME $2000

Gross-up franked dividend $2857 Capital gain received $20000 Assessable capital gain $10000 Incremental taxable income $12957 Incremental individual tax ($5786) levied Less: Imputation credit $857 Individual tax ($4929) (payable)/refund After tax return $17071 The grossed-up value fully franked dividend = dividend amount/(1-company tax rate) = $2000/(1-0.3) = $2857. Imputation credit = $857 Assessable capital gain = $20000 x 50% = $10000 Johns marginal tax rate: 45% The original investment in shares: $30000 The after-tax rate of return = $17071/$30000 = 57% p.a.

C11_ CAPITAL BUDGETING: CONCEPTS AND METHODS

Lesson 1: Capital-budgeting decisions are critical in defining a companys business. Lesson 2: Very large investments are frequently the result of many smaller investment decisions that define a business strategy. Lesson 3: Successful investment choices lead to the development of managerial expertise and capacities that influence the firms choice of future investments. The sources of profitable projects - Product differentiation insulates a product from competition, thereby allowing a company to charge a premium price. The source of differentiation can be due to advertising, patents, service or quality. The greater proportion of product differentiation creates more profits and cash flows, as well as owners value. - Cost advantage: Economics of scale arises from extending fixed costs over a larger volume of output, thus reducing the average fixed cost per unit. Economics of scope refers to widening the range of scope of services or products that an organisation can market profitably to the same customer base. - Introduce existing product in a new market Types of capital investment projects - Revenue enhancing projects: expanding existing business or introducing new products - Cost-reduction projects: reducing the cost of doing business - Mandated investment projects: companies frequently make capital investment to meet safety and environmental regulations. The typical capital budgeting process - Phase 1: the firms management identifies promising investment opportunities. - Phase 2: once the investment opportunity has been identified, its value-generating potentially thoroughly evaluated. Principle for selecting capital-budgeting criteria

Rely on cash flows rather than accounting profits to measure a projects costs and benefits. Be consistent with the goal of maximising shareholders wealth. Allow for the time value of money. Be able to account for the risks of projects.

11.1 Operating cash flows in the presence of depreciation Asset cost: $1 million EXPECTED ACCOUNTING PROFIT EXPECTED CASH FLOW Year 1 to 4 Year 1 to 4 Cash revenues $500000 Cash revenues $500000 Less: Cash expenses $100000 Less: Cash expenses $100000 Depreciation 250000 Net profit 150000 Net cash flows 400000 Interest expenses Cost of funds is known as the cost of capital and it will be used as the discount rate when you discount future cash flows back to the present. The interest expense should not be subtracted from the cash flows when doing cash-flow projections; interest has been accounted for in the discount rate. Changes in net working capital Changes in capital spending 11.2 Capital budgeting and wealth maximisation Organic kitchen will expand and diversify its operations. Various costs: $2 million Regain (recoup) net cash flows: $150000 in the first year Outlet sold: $2.45 million Rate of return: 20% Expected cash returns: $2.6 million ($0.5 million + 2.45 million) PV = $2600000/ (1+0.2) = $2167000 Net present value = the present value of the future cash flows returned by the project the initial investment = $2167000 - $2000000 = $167000 (or present value surplus) Allowing for the time value of money Discounted-cash flow capital-budgeting criteria The three capital-budgeting techniques are net present value, profitability index and internal rate of return. 1. NET PRESENT VALUE Net present value = the present value of the future cash flows returned by the project the initial investment P C (1 k I

Where ACF = expected annual cash flow in year t k= the appropriate discount rate or required rate of return IO= the initial outlay or the investment amount n the projects expected life P 0 ccept the project NPV< 0 Reject the project

Advs: a) uses cash flows b) recognises the time value of money c is consistent with the firms goal of wealth maximisation

Disadvs: Requires detailed long term forecasts of the incremental benefits and costs.

11.3 Calculating net present value $40000 investment in new equipment, 12% required rate of return with expected cash flows are: CASH FLOW Initial outlay -$40000 Year 1 $15000 Year 2 $14000 Year 3 $13000 Year 4 $12000 Year 5 $11000 The net present value of the project can be calculated as: NPV =
. ( . ( . ( . ( .

0000

= 13393 + 11161 + 9253 +7626 + 6242 40000 = 47675 40000 = 7675 Since net present value (NVP) of this project is greater than zero, the net present value criterion indicates that the project should be accepted. Otherwise, a financer uses financial table of each period. 11.4 Calculating net present value Initial cost $30000 The future cash inflows from this project are $15000 annually for three years The required rate of return is 10% Since the cash flow from year 1 to year 3 is identical, this particular stream of cash flow resembles an annuity. 2. PROFITABILITY INDEX (PI) (1

Where ACF = expected annual cash flow in year t k= the appropriate discount rate or required rate of return IO= the initial outlay or the investment amount n the projects expected life PI 1 ccept

PI< 1 Reject Advs: a) Uses cash flows. b) Recognises the time value. c) Is consistent with the firms goal of wealth maximisation. 11.5 Calculating the profitability index The present value of future cash flows is $47675 PI = = 1.19 The PI > 1, accepting the project NPV and PI is same function but NPV is superior in which it indicate the value increment as the result of under taking the project. 3. INTERNAL RATE OF RETURN (IRR) (1 Disadvs: Requires detailed, long-term forecasts of the incremental benefits and costs.

Where ACFt = expected annual cash flow in year t IO = the initial outlay or the investment amount n the projects expected life IRR the projects internal rate of return IRR required rate of return; ccept IRR< required rate of return; Reject Advs: a) Uses cash flows. b) Recognises the time value. c) Is consistent with the firms goal of wealth maximisation. Disadvs: a) Requires detailed, long-term forecasts of the incremental benefits and costs. b) Can involve tedious calculations. c) Possibility of multiple IRRs.

11.7 Computing IRR for even cash flows A required rate of return of 20% of proposals A and B. The cash flow of these projects is: PROJECT A PROJECT B Initial outlay $3817 $3817 Year 1 0 1784 Year 2 0 1784 Year 3 6271 1784 Management plans to calculate the internal rate of return for each project and determine which project should be accepted. Project s pay off is a single amount in three years time, so its IRR can be found by the use of the PVIFi,n table. $3817 =$6271(PVIFi,3) PVIFi,3 = $3817/$6271 = 0.609

Looking at the n =3, the table value of 0.609 corresponds with to an interest rate, i equal to 18%. In other words, project A has an IRR of 18% and, since this is less than required the rate of 20%, the project should be rejected. Project Bs cash inflows represent an annuity of $178 per annum. The relationship between this annuity and its present value of $3817 is given by: $3817 = $1784(PVIFAi,3) PVIFAi,3 = $3817/$1784 = 2.140 Examining three period row, the table value of 2.140 corresponds to an interest rate, i, equal to 19%; this is project Bs IRR, which is less than the required rate of 20%, so this project should not be accepted. 11.8 Computing IRR for uneven cash flows Using trial and error; Step 1: Pick an arbitrary rate, and use it to determine the present value of the outflows. Try i= 15%: Inflow year NET CASH FLOW PRESENT-VALUE PRESENT VALUE FACTOR AT 15% 1 $1000 0.870 $870 2 2000 0.756 1512 3 3000 0.658 1974 Present value of 4356 inflows Initial outlay (3817) Step 2: Comparing the above present value of the inflows with the initial outlay; if they are not equal, pick another interest rate. Since the previous PV of inflows is greater than the initial outlay, we must try a greater interest rate so as to lower the PV. Try I = 20%

Inflow year

NET CASH FLOW

1 $1000 $833 2 2000 $1388 3 3000 $1737 Present value of 3958 inflows Initial outlay (3817) Step 3: Again compare the present value with the outlay and repeat the step 2. Since the previous PV of inflows is still greater than the initial outlay, we must try an interest rate that is greater again. Try I =23% Inflow year 1 2 3 Present value of NET CASH FLOW $1000 2000 3000 PRESENT-VALUE FACTOR AT 15% 0.813 0.661 0.537 PRESENT VALUE $813 $1322 $1611 3746

PRESENT-VALUE FACTOR AT 15% 0.833 0.694 0.579

PRESENT VALUE

inflows Initial outlay (3817) Step 4: Again compare the present value with the outlay and repeat step 2. This time the PV is less than the initial outlay, meaning that the IRR is less than 23%. If it is necessary to carry out further interactions, this should proceed. However, in our example we are now reasonably close and we know that the IRR lies between 20% and 23%. We can therefore use interpolation, to move towards a solution. I (IRR) PV 20%
d1=? i%

Formatted: Font: Cambria Math

$3958
3817 d3=$141

Formatted: Font: Cambria Math Formatted: Font: Cambria Math Formatted: Font: Cambria Math Formatted: Font: Cambria Math

d2=3%

23%

3746

d4=$212

By inspection of the interpolation table we can see that unknown IRR, i%, is equal to 20% plus the distance d1. d1 = d2 x d3/d4; that is, d1 =1.995%, or (3%) we try 22% in the above presentvalue computations, it yields the desired $3817 present value of inflows. Modified internal rate of return (MIRR) Three disadvantage of IRR: 1) the IRRs assumption that a projects future cash inflows are reinvested at the IRR; 2) the prospect of multiple IRRs when future cash flows switch between positive and negative; 3) the difficulty of calculating a projects IRR without the aid of a financial calculator or spreadsheet software.

( where n = project life in years MIRR required rate of return: Accept MIRR < required rate of return: Reject

Non-discounted-cash-flow capital-budgeting criteria PAYBACK PERIOD: the number of year needed to recover the initial cash outlay. Accept if payback maximum acceptable payback period Reject if payback > maximum acceptable payback period Disadvs: The payback period calculation ignores the time value of money. Cash flows at different points in time are treated equally. The payback period ignored cash flows that are generated by the project beyond the end of the payback period.

There is no clear-cut way to define the cut-off criterion for the payback period that is tied to the value-creation potential of the investment. DISCOUNTED PAYBACK PERIOD: the number of years needed to recover the initial cash outlay from the discounted cash flows. Comparing the discounted payback period with the desired payback period makes the accept-reject decision.

Accounting rate of return (AROR) AROR compares the average profits with the average dollar size of the investment. 2 Where Apt = accounting profit in year t IO = the initial outlay SV = the expected salvage value of the project n = the expected life of the project AROR a minimum accepted AROR: Accept AROR < a minimum accepted AROR: Reject Disadvs: a) Ignore time value of money. b) Uses accounting profits rather than cash flows. 11.9 Calculating accounting rate of return Initial outlay $20000 Expected salvage value: 0 Profit annually/5 years: $800 (800 5 800 5 0.08 8% (20000 0 10000 2 The disadvantage of AROR: Its limitations of discriminating capital-budgeting criterion in which AROR technique gives equal weight to all returns within the projects life without any regard for the time value of money. It deals with accounting profit figures rather than cash flows; hence it does not reflect the proper timing of the benefits.

The role of taxation in capital budgeting

C13_RISK IN CAPITAL BUDGETING

Three measure of projects risk Projects stand alone risk: ignores diversification within the firm and within the shareholders portfolio. (Project is combined with firms other projects and assets

Projects contribution to firm risk (project form the companys perspective : ignores diversification within the shareholders portfolio, but allows for diversification within the firm (securities are combined to form diversified portfolios). Systematic risk (Project from the shareholders perspective : allows for diversification within the firm and within shareholders porfolio. Risk-adjusted discount rates (1

where ACFt = expected annual cash flow in year t k*= the risk-adjusted discount rate IO = the initial outlay or the investment amount n the projects expected life 13.1 Risk-adjusted discount rate An expected life: 5 years Normal required rate of return: 10% The minimally accepted rate of return: 15% Initial outlay = $110000 The expected cash flow annually: $30000 Required rate of return for projects with different levels of risk PROJECT REQUIRED RATE OF RETURN (%) Replacement decision 12 Modification or expansion of existing product 15 line Project unrelated to current operations 18 Research and development operations 25 Certainty-equivalent approach

The lower the risk, the higher the certain cash flow and thus the larger the value of alpha. (1 ) Where ACFt = expected annual cash flow in year t = the certainty-equivalent coefficient in year t krf =the risk-free rate of return IO = the initial outlay or the investment amount n the projects expected life 13.2 Certainty equivalent The 100 BHP-Billiton shares worth $20 each, you accept $1700 for sure instead of the chance of receiving $2000. Your certainty equivalent ( $1700 $2000= 0.85 Certain cash flow t =

13.3 Certainty equivalents in capital budgeting 10% required rate of return Expected life of 5 years Initial outlay: $120000 The expected cash inflows and certainty-equivalent coefficients are: Year, t EXPECTED CASH FLOW, CERTAINTY-EQUIVALENT COEFFICIENT, 1 $10000 0.95 2 20000 0.90 3 40000 0.85 4 80000 0.75 5 80000 0.65 The risk-free rate of interest: 6%. What is the projects net present value? Solution: Using the certainty-equivalent approach, we must remove the risk from the future cash flows. EXPECTED CASH FLOW, CERTAINTY-EQUIVALENT COEFFICIENT, 10000 0.95 9500 20000 0.90 18000 40000 0.85 34000 80000 0.75 60000 80000 0.65 52000 Year, t 1 2 3 4 5 EQUIVALENT RISKLESS CASH FLOW 9500 18000 34000 60000 52000 DISCOUNT FACTOE AT 6% 0.943 0.890 0.840 0.792 0.747 Total present value of inflows Less: Initial outlay Net present value PRESENT VALUE 8958.50 16020.00 28560.00 47520.00 38844.00 139902.50 120000.00 19902.50

The project should be accepted, as its present value is greater than zero. Sensitivity analysis: the distribution of possible net present values or internal rate of return for a particular project is affected by a change in one particular input variable. 13.5 Sensitivity anlalysis Initial cost of equipment Expected life of equipment Salvage value of equipment Working capital requirement Depreciation method

$1500000 5 years $250000 $500000 Straight line method

Annual depreciation expense Variable cost per unit Fixed cost per year Discount rate Corporate tax rate

$250000 $20 $400000 12% 30%

Scenario analysis: changing only one input variable at a time and analysing its effect on the investment NPV. 13.6 Simulation analysis: generating thousands of estimates of NPV that are built upon thousands of values for each of the investments key variables. Probability tree

Real options in capital budgeting - Timing opinion: the option of delay a project until estimated future cash flows are more favourable - Expansion option: the option to increase the scale or scope of an investment in response to realised demand. - Contract, shut down and abandonment options: the options to slow down production, halt production temporarily, or stop production permanently (abandonment). 13.7 The option to expand a project the initial outlay on this new restaurant: $2.4 million the present value of the free cash flows (excluding the initial outlay): $2 million a negative NPV: -$400000 Probability of new restaurant received 50% with annual cash flows: $320000/year Probability of new restaurant received 50% with annual cash flows: $80000/year The discount rate of return: 10% If the new restaurant is favourably received, the PV of perpetual cash flows: $320000/0.1 = 3200000 NPV= 3200000 2400000 =$800000 If the new restaurant is unfavourably received, the PV of perpetual cash flows: $80000/0.1 =$800000 NPV =800000 240000 = -$1600000 If the restaurant is succeeding, you will build more restaurants.

Each of these outcomes has 50% probability, the expected NPV: Expected NPV = (0.5x5x800000)+(0.5x1x-1600000)=$400000 NPV of the project without the option to expand: NPV =(0.5x800000)+(0.5x-1600000) =$400000

C4_THE TIME VALUE OF MONEY

Compound interest concepts The annual rate of compound interest (j) or nominal annual rate or APR (annual percentage rate) The periodic rate of compound interest (i) The number of times that interest is compounded each year (m) 4.1 Compound interest rates j =12%, m =2 times/annum, the half yearly rate: i=j/m =12%/2=6%

m: compounded times per year t: years n: the total number of compounding periods 4.2 Future value at compound interest $1000 investment compound interest: 12% per annum for 3 three years compounded half-yearly a rate I = 6% every half year n = 6 half year HALF YEAR 1 2 3 4 5 6 OPENING BALANCE $1000 1060 1123.60 1191.02 1262.48 1338.23 INTEREST AT 6% 60 63.60 67.42 71.46 75.75 80.29 CLOSING BALANCE 1060 1123.60 1191.02 1262.48 1338.23 1418.52

(1 PV = $1000 I =6% (per half year) n = 6 (half years) (1 = $1000(1.41852) =$1418.52

C9_RISK AND RATE OF RETURN

C14_COST OF CAPITAL C16_CAPITAL-STRUCTURE POLICY C17_DIVIDEND POLICY AND INTERNAL FINANCING ::: C19_SHARES AND CONVERTIBLE SECURITIES