Financial Management Mini Assignment 2
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Financial Management Mini Assignment 2

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Question

IMPORTANT NOTES

Plagiarism and other forms of academic dishonesty are treated as serious offences by the University and are subject to penalties, which may include expulsion from the University. Ensure that you have read and understood the University's policy on academic dishonesty.

Failure to submit the assignment for this topic is deemed to constitute failure to meet the assessment requirements for the purposes of eligibility for supplementary assessment on academic grounds.

Provide workings and/or explanations for all calculations.

CHAPTER 5. RISK AND RETURN (35 MARKS)

You have been given the following data on 3 assets – A, B, and C

Year Expected Return (%)

                   Asset A          Asset B            Asset C

2011                 7                    9                      5

2012                8                    7                      6

2013               10                   8                      7

2014 11 7 9

The allocation of the investment money is as follows:

Asset A: $660,000

Asset B: $530,000

Asset C: $420,000

  1. Calculate the expected return for the portfolio in each year and for the period 2011-14.
  2. Calculate the standard deviation for the portfolio for the period 2011-14.
  3. Calculate the coefficient of variation for the portfolio for the period 2011-14.
  4. What are your remarks in regards to the expected return versus the risk of the portfolio? Compare your result with the current official interest rate and share/property market performance (open question)?

CHAPTER 4. TIME VALUE OF MONEY (10 MARKS)

A pension company is trying to sell you a retirement annuity, which for a single amount paid today will provide you with $12,000 at the end of each year for the next 25 years. You currently earn 9% on low risk investments comparable to the retirement annuity. Ignoring taxes, what is the most you would pay for this annuity?

CHAPTER 6. INTEREST RATE AND BOND VALUATION (20 MARKS)

What is the appropriate yield to maturity for a $1000 par value bond selling for $1120 that matures in 6 years and pays 12% interest annually?

Hint: Use your critical analysis and trial-error method to estimate the yield to maturity. Provide all workings.

CHAPTER 7. SHARE VALUATION (35 MARKS)

1) Value an ordinary share of PBG Ltd using the free cash flow model. Assume current date is 2017.

Given information:

Weighted average cost of capital: 11%

Value of debts: $1,500,000

Value of preference shares: $400,000

Forecast free cash flows:

2018 $200,000

2019 $250,000

2020 $310,000

2021 $350,000

2022 $390,000

Number of ordinary shares: 200,000

Assume a zero growth rate beyond 2022.

2) Open discussion question: Examine the advantages and disadvantages of different share valuation models (150-200 words).

Solution

Risk and return

Computation of portfolio return for each year

Computation of portfolio return for 2011
 Expected return (r )Allocation of investmentWeights (w)Weighted return (w*r)
Asset A7%$660,000 41%2.87%
Asset B9%$530,000 33%2.96%
Asset C5%$420,000 26%1.30%
Portfolio return$1,610,000 100%7.14%
Computation of portfolio return for 2012
 Expected return (r )Allocation of investmentWeights (w)Weighted return (w*r)
Asset A8%$660,000 41%3.28%
Asset B7%$530,000 33%2.30%
Asset C6%$420,000 26%1.57%
Portfolio return$1,610,000 100%7.15%
Computation of portfolio return for 2013
 Expected return (r )Allocation of investmentWeights (w)Weighted return (w*r)
Asset A10%$660,000 41%4.10%
Asset B8%$530,000 33%2.63%
Asset C7%$420,000 26%1.83%
Portfolio return$1,610,000 100%8.56%
Computation of portfolio return for 2014
 Expected return (r )Allocation of investmentWeights (w)Weighted return (w*r)
Asset A11%$660,000 41%4.51%
Asset B7%$530,000 33%2.30%
Asset C9%$420,000 26%2.35%
Portfolio return$1,610,000 100%9.16%
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Average portfolio return during the period 2011-14

YearPortfolio return
20117.14%
20127.15%
20138.56%
20149.16%
Average return8.00%

Working notes: 

1. The weights represent the proportion of investment which a security bears to the total investment. It has been computed as follows

W= investment in an asset/total investment *100 (Weaver & Weston, 2001)

2. Weighted return represents the multiplication of weights and return.

Weighted return = weights* returns (Weaver & Weston, 2001)

3. Portfolio return is the summation of weighted return (Weaver & Weston, 2001).

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