Assignment
Students are to complete this assignment in groups of three (3). It consists of three (3) parts, all of which must be attempted. (If it is unavoidable, groups of two may be considered).
Students should concentrate on the following for Part three (3):
- Introduction,
- Content,
- Expression,
- Presentation,
- Conclusion, and
- Reference List.
Part 1
1a) While Jessica Holden was on vacation, she found a lovely holiday home of her dreams. This home was listed with a sale price of $200,000. The only catch is that Jessica is 40 years old and plans to continue working until she is 65. Jessica believes that price generally increase at the overall rate of inflation. She believes that she can earn 9% annually after tax on her investments. Jessica is willing to invest a fixed amount at the end of each of the next 25 years to fund the cash purchase of such a house (one that can be purchased today for
$200,000) when she retires.
a) Inflation is expected to average 5% a year for the next 25 year. What will Jessica's dream house cost when she retires?
b) How much must Jessica invest at the end of each of the next 25 years in order to have the cash purchase price of the house when she retires?
c) If Jessica invests at the beginning instead of at the end of the next 25 years, how much must she invest each year?
1b) William Baker invested $100 000 to set up the following portfolio one year ago.
|
Asset
|
Cost
|
Beta at Purchase
|
Yearly Income
|
Value Today
|
|
A
|
$20 000
|
0.80
|
$1 600
|
$20 000
|
|
B
|
35 000
|
0.95
|
1 400
|
36 000
|
|
C
|
30 000
|
1.50
|
-
|
34 500
|
|
D
|
15 000
|
1.25
|
375
|
16 500
|
a) Calculate the portfolio beta on the basis of the original figures.
b) Calculate the percentage return of each asset in the portfolio for the year.
c) Calculate the percentage return of the portfolio on the basis of original cost, using income and gains during the year.
d) At the time William made his investments, investors were estimating that the market return for the coming year would be 10%. The estimate of the risk free rate of return averaged 4% for the coming year. Calculate an expected rate of return for each share on the basis of its beta and the expectations of market and risk-free returns.
e) On the basis of the actual results, explain how each share in the portfolio performed relative to those CAPM-generated expectations of performance. What factors could explain these differences?
1c) K-mart is considering the purchase of one of two security cameras - V and Z. Both should provide benefits over a 10-year period, and each requires an initial investment of $4000. Management has constructed the following table of estimates of probabilities and rates of return for pessimistic, most likely and optimistic results:
|
|
Camera 1
|
|
Camera 2
|
|
|
|
Amount
|
Probability
|
Amount
|
Probability
|
|
Initial Investment
|
$4000
|
1.00
|
$4000
|
1.00
|
|
Annual rate of return
|
|
|
|
|
|
Pessimistic
|
20%
|
0.25
|
15%
|
0.20
|
|
Most likely
|
25%
|
0.50
|
25%
|
0.55
|
|
Optimistic
|
30%
|
0.25
|
35%
|
0.25
|
a) Determine the range of the rate of return for each of the two cameras.
b) Determine the expected rate of return for each camera
c) Which camera is more risky? Why?
Part 2
2a) Karen Roland a 25-year old graduate wishes to retire at age 65. To supplement other source of retirement income, she can deposit $2000 each year into an individual retirement fund. The fund will be invested to earn an annual return of 10%, which is assumed to be attainable over the next 40 years.
a) If Karen makes annual end-of-year $2000 deposits into the fund, how much will she have accumulated by the end of her 65th year?
b) If Karen decides to wait until age 35 to begin making annual end-of-year $2000 deposits into the fund, how much will she have accumulated by the end of her 65th year?
c) Using your findings in parts a and b, discuss the impact of delaying making deposits into the fund for 10 years (age 25 to age 35) on the amount accumulated by the end of Karen's 65th year.
d) Rework parts a and b, assuming that Karen makes all deposits at the beginning, rather than the end, of each year. Discuss the effect of beginning-of-year deposits on the future value accumulated by the end of Karen 65th year.
2b) Consider the mixed streams of cash flows shown in the following table.
|
|
Cash flow stream
|
|
|
Year
|
A
|
B
|
|
1
|
$50 000
|
$10 000
|
|
2
|
40 000
|
20 000
|
|
3
|
30 000
|
30 000
|
|
4
|
20 000
|
40 000
|
|
5
|
10 000
|
50 000
|
|
Totals
|
$150 000
|
$150 000
|
a) Calculate the present value of each stream using a 15% discount rate.
b) Compare the calculated present values and discuss them in the light of the fact that the discounted cash flows total $150 000 in each case.
2c) You have been given the following return data on three (3) assets - A, B and C over the period 2011-2014
|
Expected return %
|
|
Year
|
Asset A
|
Asset B
|
Asset C
|
|
2011
|
16
|
17
|
14
|
|
2012
|
17
|
16
|
15
|
|
2013
|
18
|
15
|
16
|
|
2014
|
19
|
14
|
17
|
Using these assets, you have isolated three investment alternatives:
|
Alternative
|
Investment
|
|
1
|
100% of asset A
|
|
2
|
50% of asset A and 50% of asset B
|
|
3
|
50% of asset A and 50% of asset C
|
a) Calculate the expected return on the four-year period for each of the three alternatives
b) Calculate the standards deviation of returns over the four-year for each of the three alternatives.
c) Use your findings in parts a and b to calculate the coefficient of variation for each of the three alternatives. Based on your findings above, which of the three investment alternatives would you recommend? Why?
Part 3
Note: students are strongly urged to read reviewed academic journal articles and provide at least five academic journal articles in the reference. Provide relevant examples and where appropriate use graphs to illustrate your answers.
The following two quotations show there is an increasing interest among finance researchers on how the Chief Executive Officer's (CEO) reputation can influence corporate capital investment and its market value.
Carefully consider the two quotations:
Quotation 1:
"There is substantial literature that examines the wealth effects of corporate capital investments. This literature primarily analyses the effects of firm characteristics such as size, market-to-book ratios and leverage on the stock price reaction surrounding capital investments. In general, these studies document considerable heterogeneity in the stock price reaction around the announcements of corporate capital investments and much of this heterogeneity cannot be explained by firm-level characteristics, even after controlling for industry effects. Many researchers attribute these valuation effects to the signalling of new information about the announcing firm's future cash flow prospects (McConnell and Muscarella, 1985; Woolridge and Snow, 1990; Chan et al., 1995; Chen and Ho, 1997; Vogt, 1997). However, there is little research on factors that affect the credibility of such information signals. In this study, we posit that CEO reputation is an important determinant of the credibility of information signals relating to announcements of capital investments. Specifically, we examine the role of CEO reputation on the wealth effects associated with corporate capital investments. Thus, the primary contribution of this paper is to explicitly consider a managerial human capital dimension in explaining the economic effect of corporate capital investments." (Jian and Lee, 2011, p.929).
Source: Jian, M and Lee K.W (2011), ‘Does CEO reputation matter for capital investments?',
Journal of Corporate Finance, 17, pp. 929-946.
Quotation 2:
"The past several years have not been easy for big business and its leaders: CEOs. Research has found that respect for corporate leaders and large multinationals has declined. Between the global financial crisis, spread of worldwide protest movements such as Occupy, backlash against executive compensation, and even employee revolts, CEOs have faced numerous threats to their reputation and those of the companies they run. Despite this erosion in positive perceptions of CEOs, Weber Shandwick's research continues to find that CEO reputation is a fundamental driver of corporate reputation, and is unwavering in its contribution to market value. Our newest research, reported herein, finds that global executives estimate that nearly one half of a company's market value is attributable to its CEO. CEO reputation continues to be a premium form of currency and wealth in an economy where companies trade on their reputations every day. As Michael Fertik, founder and CEO of reputation.com, says, "Reputation is the new oil"." (Weber Shandwick, 2015, p.2).
Required: Discuss the importance of CEO reputation for capital investment and company value.
NB: 1) Understanding the notions of stakeholder engagement and corporate governance is more important than an enlargement with the advanced maths in many articles.
2) Do not plagiarise articles content-instead cite, or better yet, paraphrase it and always give full references. This shows that your opinions are informed opinions.
Attachment:- FINANCIAL MANAGEMENT.rar