NPV and Payback Rule – Financial Decision Assignment Help Applicability of NPV / Payback Rule

The concept of NPV/ payback method can be applied in a small business owner that is helpful to finance the business. NPV is a method by which a business can determine the difference between the investment amount and present value future cash flow. It is quite significant method that helps the owner to take good financial decisions (Fried, G., Shapiro, & DeSchriver, 2008). Identification of value of money is an important decision, because it influences the financial decisions such as financing, discounting and financial returns etc. According to the business finance assignment help experts, the rule of NPV

is applicable in this type of situation, because it helps to make superior financial decisions. It is applied in small business financing, because it will discount all the future cash flow to present time with the required rate of return. It helps to determine about the opportunities that these are profitable or not to the business. The financial decisions are influenced by the time value of money (Fabozzi & Drake, 2010). Time value of money derives from the interest rate that changes financial decisions related to the investment.

Advantages and Disadvantages of Debt Financing Debt financing permits the owner to preserve ownership and control of the business in his/her hand. It is also beneficial to the business entrepreneurs that make them able to take key strategic decisions related to the reinvestment of its profit to earn more. For small business owner, debt financing provides a greater degree of financial freedom. Other benefit of debt financing is that it can enhance credit rating of a small business and helps to make it able to acquire several financing in future (Romano, Tanewski & Smyrnios, 2001). In addition, it is less expansive financing for the small business in the long term period. The management of small business can take the benefit of debt financing, because it needs complex reporting requirements. On the other hand assignment help , there are some disadvantages also found out of the debt financing to the small business. The main disadvantage of debt financing is that it needs regular payment of principal and interest. The regular payment creates difficulty to the management to reinvest the profit of the business that reduces the business earnings (Czarnitzki & Kraft, 2009). Small business can obtain limited amount of money through debt financing, so it is needed to use other financing sources. Credit rating of small business can be reversed, if the business becomes failure to make payment of loan. Stock versus Bonds: An organization prefers to issue stock rather than bonds, as stock has not maturity period to repay principle amount, if it is terminating its operations. Stock makes dividend and bond attracts interest to repay that decision is in hand of board of members. Trading of stock is done on daily basis, but bonds are traded when organization issue new bonds.

Financial Risk and Return The return on investment totally depends upon the risk in the project. The small business has to take higher risk to get higher return. In addition, it is not guaranteed that higher risk provides higher return, so it may be or may not be. The financial experts suggested that higher risk creates a chance to earn higher returns but not sure. Thus, it can be said that risk and returns of investment are quite related to each other (Chen & Tang, 2005).  As per US and Australia assignment help experts, there is five factors model that affect the financial decisions and returns of the project. This model includes five financial risks that are credit risk, term risk, market risk, size risk and price risk. All these risks have a great impact on the financial returns of the project. Risk analysis: At the same time, credit risk passes on through the possibility of promised returns and initial investment. In addition, term risk is related to the return that is gained from the value of investment or interest. If investors invest money in security market, they should analyze risk factors for their return. The main three factors affect the investment return of the small business that are price factor, size factors and market factors etc. These factors contain greater risk to allocate the component of security market (Wealth Foundations, 2009). The higher return on investment encourages investors to take higher risk in the market related to investment.

Concept of Beta and its Use Beta is a statistical measure of risk that is associated with individual stock or asset relative to total risk of whole stock market. The concept of beta is used to measure volatility, and systematic risk of a single financial security as compared to market risk. Beta reflects the linear regression relationship between the expected return on the individual security and return on the market portfolio (Clayman, Fridson & Troughton, 2012). If a stock has beta of 1, it indicates stock price will move with the market in same direction. On the other side, beta of less than 1 show that stock will be less volatile as compared to market, while beta of more than 1 means higher volatility of financial security. In the financial management assignment help, beta is a useful concept for the individual as well as institutional investors to assess risk with different stocks during the selection of financial security for the investment. In the capital asset pricing model (CAPM), beta is useful to calculate expected rate of return of a stock. Along with this, it is useful for stock analysts and investors to determine risk profile of a security or stock (Mcmillian, Pinto & Pirie, 2011). At the same time, the concept of beta is also useful to assess stock performance of a company in the industry by making comparison with industry beta.

Systematic and Unsystematic Risk A small business may have both systematic and unsystematic risks due to uncertainty in the economic conditions and situations. Both of these risks are adverse to each other, because systematic risks affect the entire market such as change in investment policy, foreign investment policy, change in taxation policy, changing socio-economic parameters etc. On the other hand, unsystematic risk affects a particular industry or organization such as product kind, research and development, pricing, marketing policy etc. In addition, investor can mitigate the systemic risk at a large degree by portfolio diversification, because it can be controlled by the investor (Bansal & Clelland, 2004). These types of risks can be avoided and do not compensate by the market. Systematic risks are non-diversified risks that are the relevant portion of an asset. Whereas, unsystematic risks are diversified risks that show a relationship between certain random causes and portion of a particular asset.

Diversify Investment Plan In order to invest $1 million, the investment manager of corporation will make a portfolio by including three stocks or financial securities from different sectors to diversify risk and get higher return. By making diversify portfolio, the company will earn good return on $1 million investment with lower level risk. In this plan, two stocks like, Pepsi and Toyota Corporation and one bond will be selected to invest $1 million capital of the firm. The following table shows the information related to proportion of amount for each stock in the portfolio.

Component	Weight	Amount
Pepsi	35%	$350000
Toyota Corporation	25%	$250000
Bond	40%	$400000

This investment decision will be beneficial for the company to earn good return by taking minimum risk due to diversification of portfolio that helps to reduce degree of investment risk (Mcmillian, Pinto & Pirie, 2011). References Bansal, P. & Clelland, I. (2004). Talking Trash: Legitimacy, Impression Management, and Unsystematic Risk in the Context of the Natural Environment. The Academy of Management Journal, 47 (1), p. 93-103. Chen, S.X. & Tang, C.Y. (2005). Nonparametric Inference of Value-At-Risk for Dependent Financial Returns. Journal of Financial Econometrics, 3 (2), 227-255. Clayman, M.R., Fridson, M.S & Troughton, G.H. (2012). Corporate Finance: A Practical Approach (2nd ed.).  USA: John Wiley & Sons. Czarnitzkia, D. & Kraft, K. (2009). Capital Control, Debt Financing and Innovative Activity. Journal of Economic Behavior & Organization, 71 (2), p. 372–383. Fabozzi, F.J. & Drake, P.P. (2010). Financial Risk Management. USA: John Wiley and Sons. Fried, G., Shapiro, S.J. & DeSchriver, T.D. (2008). Sport Finance. (2nd ed.). USA: Human Kinetics. Mcmillian, M.G., Pinto, J.E & Pirie, W. (2011). Investments: Principles of Portfolio and Equity Analysis. USA: John Wiley & Sons. Romano, C.A., Tanewski, G.A. & Smyrnios, K.X. (2001). Capital structure decision making: A model for family business. Journal of Business Venturing, 16 (3), p. 285–310. Wealth Foundations. (2009). Foundations of Financial Economics. Retrieved February 22, 2012 from http://www.wealthfoundations.com.au/foundations-of-financial-economics-risk-and-return.html

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