Financial Management Group Assignment 2 2023-24 S2 PDF

Introduction to Financial Management Group Assignment 2 2023-24 S2 ***************************************************************************** (1) Please submit the assignment via sub-class Soul 3.0 page. (2) The d...

Introduction to Financial Management Group Assignment 2 2023-24 S2 ***************************************************************************** (1) Please submit the assignment via sub-class Soul 3.0 page. (2) The deadline for the assignment is 30 April (Tuesday), 23:59 HKT. Late submission is subject to penalties as shown below: Late by Marks deducted 1 calendar day (24 20% hours) after due time 2 calendar days (48 50% hours) after due time 3 calendar days (72 100% hours) after due time (3) Students who are found copying homework or lending work to others for copying will receive NO mark. (4) Each group should be made up of 1-2 members from the same sub-class. (5) One Submission per group ONLY (6) Please clearly put down you and your group-mate class number, name and student ID on the front page of the assignment. (7) Answers must be handwritten in blue/black ballpoint pen on plain white A4 size paper. [Note: Any failure to comply with the requirements here will result in mark penalty.] (8) Please make sure enough space is left between each sub-part of the question and each question to facilitate marking. (9) Round your final answers to two decimals places. (10) This assignment (50 marks in total) accounts for 12% of the course assessment. ***************************************************************************** 1 Note: Correct answer to calculations-based questions will only be awarded full mark if clearly stated numerical formula (including the left-hand side of the equation) is provided. Correct answer without calculations support will only receive a tiny fraction of mark assigned for the question. Question 1 (11 marks) On 1 April 2024, you’ve just purchased a 10-year bond issued by MTR Corporation to finance the future railway development. The bond has a face value of $1,000 and carries 8% coupon, paid semi-annually. The yield of the bond is (APR) 10%, compounded semi-annually. (a) How much did you pay to buy the bond on 1 April 2024? (4 marks) (b) Is the bond a par bond, discount bond or premium bond? Explain. (2 marks) (c) On 31 March 2025, the bond becomes a par bond as its yield has decreased from (APR) 10% to (APR) X%, compounded semi-annually. (i) What is the value of X? Explain. (2 marks) (ii) If you sell the bond immediately after receiving the (second) coupon, calculate the capital gain yield. (3 marks) 2 Question 2 (13 marks) Ms. Jane Tong is planning her early retirement. Currently, Jane has $10,000,000 in savings and plans to invest all the money into CBIC Corporation’s shares. CBIC has just paid an annual dividend of $20 per share. It is expected that the company’s dividend will grow by 10% per year for the next two years before settling at a constant 5% per year indefinitely. CBIC has a beta of 1.5. Given the risk-free interest rate is 4% and the market risk premium is 5%. (a) Compute the required return on CBIC shares using CAPM. (3 marks) (b) What are the expected dividends (D1 , D2 and D3) for the following three years? (3 marks) (c) Given the required return in part (a), calculate the intrinsic value of one CBIC share. (5 marks) (d) How many shares of CBIC shares can Jane purchase today? (2 marks) 3 Question 3 (17 marks) Steven is a financial planner at Morgan Investment Bank. He has just compiled data for the analysis of two assets: Stock S and Portfolio M (the “market portfolio”). The performances of the two assets under various states of the economy next year are shown in the table below. State of Economy Probability of Rate of Return if State Occurs Next Year State of Economy Stock Super (S) Portfolio M (M) Boom 0.1 9% 12% Normal 0.5 7% 5% Recession 0.4 -5% -6% Expected Return ??? 1.3% Standard ??? ??? Deviation (a) Compute the expected return for Stock S. (2 marks) (b) Based on the answer to (a), compute the standard deviation of return for Stock S and Portfolio M. (5 marks) (c) Based on the results in (a) and (b), which asset (Stock S or Portfolio M) should Steven recommends his clients to invest in? Briefly explain. (2 marks) (d) Assume that the correlation coefficient between Stock S and Portfolio M is 0.4. If Steven forms a portfolio that consists of 80% of Stock S and 20% of Portfolio M, compute the portfolio standard deviation of return. (3 marks) (e) Assume the risk-free return is 1% and the portfolio formed in (d) has a beta value of 1.4. Based on CAPM, calculate the required rate of return of the two-asset portfolio formed in (d) and explain whether you will invest in the portfolio. (5 marks) 4 Question 4 (9 marks) ABC Inc. is considering investing in the following capital project that is expected to provide 10 years of cash flows (= sales revenue net of operating costs). The expected year-end cash flows are as follows: Project A: $0 (Years 1 – 2) and $250,000 (Years 3 – 10) The required rate of return for the project is 10% per year. Suppose Project A’s initial expenditure is $1,000,000. (a) Use the net present value (NPV) method to determine whether the project should be taken. (4 marks) (b) If ABC uses other decision rules such as IRR, would it arrive at the same decision as NPV? Explain. (2 marks) (c) Put down the numeric formula (NO calculation of the final answer is required) for Project A’s internal rate of return (IRR) and state the condition under which Project A will be REJECTED. (3 marks) -END- 5