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...

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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.


Answered Same DaySep 25, 2021HI5002

Answer To: 1) Analysis of five basic principles of finance: Define the five basic principles finance and...

Angel K answered on Sep 27 2021
142 Votes
Analysis Of Five Basic Principles Of Finance
A business entity has many segments that are designed to express true and fair view of its operating efficiency to the interested users. Every company is required to keep and also to exhibit their financial record for every period to provide d
etailed information to the managers, investors and other stakeholders. Principles of finance are some basic tools used by the interested parties of an entity while evaluating the worth or value of a firm. There are mainly 5 principles of finance such as follows.
Cash flow
It is a principle used by the interested users to examine the operating efficiency of an entity. Cash flow of a business does not indicate the profit earned in a given time but the revenue recognized and the amount expended for the normal operation of a business. People are considering it as an important principle as it will help them to check whether the company is expected to make profit from their operations.
Time Value
It is a major principle followed by the investors. This principle of finance explains that the value of money will change over time. It will help the investors to analyse whether it will be profitable to invest in a business. This evaluation is made by identifying the expected change in the value of a business considering its past and present performance.
Risk
Risk is an inevitable part of business. A business entity can adopt so many precautionary measures to reduce risk but it can never be excluded. The magnitude of risk is considered as an important principle of finance. This is because the risk is always related to reward. That is if a business entity is engaging in a project having high risk, the monetary gain will also be higher than low risk activities.
Diversification
Financing is the process of spending the money at hand for procuring a return in the future. Diversification is one of the major principles that promise better return while spending the cash at hand. This is because, if an investor is spending their capital on multiple projects than a single one, the risk of loss will get diluted. Diversification will also help people to explore more opportunities and new marketplaces.
Difference In Interest
One of the unique principles of finance is that the interest or the objective of the management of a business and their stakeholders will be different. This is because, the main objective of a business will be their profit maximisation while the interest of an investor will be in higher return. Therefore, the business entity must effectively balance the interests of both parties for better functioning.
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