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BUSN9227 FINANCIAL MANAGEMENT

MINI-ASSIGNMENT 2

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 Universitys 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 (20 MARKS)

PROBLEM 5.1. 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

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

CHAPTER 4. TIME VALUE OF MONEY (15 MARKS)

Problem 4.1. 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 (10 MARKS)

Problem 6.1. 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 (25 MARKS)

Problem 7.1. ABC Ltds most recent annual dividend was $0.90 per share. The required return is 11%. Find the share value of ABCs shares if its dividends are expected to growth at 8% annually for 3 years followed by a 5% constant growth rate from year 4 to infinity.

Problem 7.2. Value an ordinary share of PBG Ltd using the free cash flow model.

Weighted average cost of capital: 11%

Value of debts: $1,500,000

Value of preference shares: $400,000

Free cash flows:

2012 $200,000

2013 $250,000

2014 $310,000

2015 $350,000

2016 $390,000

Number of ordinary shares: 200,000

Assume a zero growth rate beyond 2016.

BUSN9227 FINANCIAL MANAGEMENT MINI-ASSIGNMENT 2 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 (20 MARKS) PROBLEM 5.1. You have been given the following data on 3 assets - A, B, and C Year 2011 2012 2013 2014 Expected Return (%) Asset A Asset B 7 9 8 7 10 8 11 7 Asset C 5 6 7 9 The allocation of the investment money is as follows: Asset A: $660,000 Asset B: $530,000 Asset C: $420,000 1) 2) 3) 4) Calculate the expected return for the portfolio in each year and for the period 2011-14. Calculate the standard deviation for the portfolio for the period 2011-14. Calculate the coefficient of variation for the portfolio for the period 2011-14. What are your remarks in regards to the expected return versus the risk of the portfolio? considering the current official interest rate and share/property market performance (open question)? CHAPTER 4. TIME VALUE OF MONEY (15 MARKS) Problem 4.1. 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 (10 MARKS) Problem 6.1. 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 (25 MARKS) Problem 7.1. ABC Ltd's most recent annual dividend was $0.90 per share. The required return is 11%. Find the share value of ABC's shares if its dividends are expected to growth at 8% annually for 3 years followed by a 5% constant growth rate from year 4 to infinity. Problem 7.2. Value an ordinary share of PBG Ltd using the free cash flow model. Weighted average cost of capital: 11% Value of debts: $1,500,000 Value of preference shares: $400,000 Free cash flows: 2012 $200,000 2013 $250,000 2014 $310,000 2015 $350,000 2016 $390,000 Number of ordinary shares: 200,000 Assume a zero growth rate beyond 2016