Part A- Questions
Question 1: Portfolio valuation
Consider shares in two companies, JAY and KAY, as follows:
|
|
Expected Return
E(R)
|
Standard Deviation
s
|
Correlation Coefficient
r
|
|
Share JAY
|
12%
|
18%
|
- 0.3
|
|
Share KAY
|
24%
|
32%
|
a) Calculate the covariance between Share JAY and KAY returns.
b) What is the expected return and standard deviation of returns on a portfolio comprising 35% in Share JAY and 65% in Share KAY?
c) If you wanted to create a portfolio consisting only of these two shares, how much would you need to invest (weights) in each share so that your portfolio return would be equal to 15.6%? Note: do not round.
d) Using the weights calculated in part c), calculate the variance and standard deviation of your portfolio.
Question 2: Bond valuation
Jasmine Ltd is considering issuing bonds to raise funds for a new project. The following three options are being considered.
|
Bond
|
Coupon Rate
|
Coupon/Compounding Frequency
|
Yield
|
Term in years
|
Face Value
|
|
A
|
0%
|
half-yearly
|
7.5%
|
5
|
$1,000
|
|
B
|
6.5%
|
half-yearly
|
7.5%
|
10
|
$1,000
|
|
C
|
8.4%
|
yearly
|
7.5%
|
8
|
$1,000
|
a) Calculate the market price of each bond.
b) Classify each bond as either selling at a premium, par or discount.
c) Assume Jasmine has decided to issue only B Bonds. If Jasmine Ltd needs to raise $465,260 how many bonds would need to be issued?
Question 3: Share valuation
Calculate the current market price of each of the following shares assuming a discount rate of 10%.
a) NoChange Ltd is a company with no growth potential. Its last dividend was $4.25, and it expects no change in future dividends.
b) ConstantGrowth Ltd just paid a dividend of $4.25 and it expects its dividend to grow steadily at 4% per year.
c) SteadyGrowth Ltd plans to pay a dividend of $4.25 next year. It expects its dividend to grow steadily at 4% per year.
d) SuperGrowth Ltd just paid a dividend of $4.25 and it expects its dividend to grow quickly at 12% per year for the next three years. It then expects the growth rate to remain constant at 4% per year.
e) QuickGrowth Ltd plans to pay a dividend of $4.25 next year. It expects its dividend to grow quickly at 12% per year for the next three years. It then expects the growth rate to remain constant at 4% per year.
Part B- Assessment Brief
Individual Assessment - case study analysis
Learning outcomes addressed-
-Explain the importance of the time value of money, risk and return and cash flow when making informed business decisions including capital budgeting.
-Understand working capital management
-Evaluate the concept of optimal capital structure
Assessment Brief -
-Students need to write a short report based on a case study which will be uploaded into the moodle in week 4.
-The assignment requires student to discuss/solve problems, apply capital budgeting techniques (NPV, IRR etc.) and perform calculation to support capital budgeting decision making
-Responses need to be given for the specific questions raised in the case study.
-All the calculations need to be shown in the document.
-Make a brief theoretical discussion under themes of each question.
-Finally, results need to be presented in a formal report format. At the same time recommendations must be given by analysing and interpreting the findings that are derived from the calculations.
-Word limit: Maximum length 1500 words (+/ - 10%) - not including the title page, executive summary, table of contents and appendices.
Number of Words - 2250 Words / 9 Pages
Style: Harvard
References: 5.