FINANCIAL MANAGEMENT

This assignment consists of Three questions. All three questions must be answered. Assignment is to be completed in groups of three.

Q1.

Assume you have $10,000,000 AUD to invest in financial assets under the following limitations - you must:

• Diversify your portfolio among four assets sectors: 1) cash, 2) banking sector (shares of one bank only, you are restricted to select one bank from the following banks: Commonwealth Bank, Westpac Banking Corporation or ANZ Banking corporation ); 3) mining sector (shares of one mining company only, you are restricted to select one from the following mining sector companies: BHP Billiton, Fortescue or Newcrest Mining) and 4) wholesale and retail sector (shares of one company only, you are restricted to select one from the following companies:

Woolworths, Coca-cola Amatil).

Answer all the questions below:

i. Explain why you selected specific assets in your portfolio, support your answer with current evidence (maximum of 600 words).

ii. Show the trend behaviour of your three assets (Except cash) from January 2009 -October 2014.

iii. Select the mining sector asset in your portfolio and explain the last two year behaviour of that asset using weekly or monthly data, use graphs as appropriate (maximum of 300 words).

iv. Calculate and show the capital gain/(loss) of your banking asset, if you had bought at the (average) price in Jan/2012 and sold in Oct 2014. Ignore any tax effects. What is the holdingperiod return of this asset at the end of the time period (i.e. Oct 2014- selling day can be any day in Oct 2014) - You are allowed to do three transactions on this asset during this whole period (support the transactions with a full and appropriate data set;

Q2. (Maximum word limit 700 words)

In an effort to analyse the agency problem and the firm value maximisation, Hanlon, Rajgopal and Shevlin (2003) p.4. state
"The incentive alignment perspective typically advocated by a number of financial economists states that options are granted to reduce the moral hazard problem that stems from senior managers owning very little of the firms they manage. A substantial body of theoretical work beginning with Jensen and Meckling (1976) suggests that option contracts can align managers' incentives with that of shareholders. Consistent with this perspective, researchers (e.g., Demsetz and Lehn 1985; Himmelberg, Hubbard and Palia 1999; Core and Guay 1999; Rajgopal and Shevlin 2002) have predicated their analyses on the premise that granting options is consistent with firm value maximization."
Hanlon, M., Rajgopal, S. and Shevlin, S. (2003), ‘Are Executive Stock Options Associated with Future Earnings?' Journal of Accounting and Economics, Vol 36(1), p.3 - 43.

Explain the concept ‘executive stock options'. What are the advantages and disadvantages of ‘executive stock options'? Students are strongly urged to read reviewed journal articles and provide at least two academic journal articles in the reference. Please note: understanding the notions in the articles is more important than an entanglement with the advance math in many of the articles.

Q3. (Maximum word limit 700)

How important is good governance and ethics for a firm? Provide answers with examples and theoretical explanations.