Assessment task
You can undertake this assignment either individually or in a group of maximum three students. Please note that if you decide to work in a group, your group will submit one assignment and all the group members will receive the same mark (assuming that all the members involved have made reasonably equal contributions). So, you are advised to choose the members of your group carefully. If plagiarism or excessive copying is detected, each student in the group will be jointly liable and receive a reduced mark or be subject to an academic misconduct charge. If yours is a group assignment, you will need to indicate on your cover sheet the other members of your group by name and student identification number.
Please note that submitting in group is optional and you can opt to submit individually.
You are required to complete a set of mathematical problems, discussion questions and case studies outlined in the next section.
Calculations can be illustrated using an Equation Editor, MathType or financial calculator steps. If you use the financial calculator steps method, you must show the formula and figures in the formula as well as the financial calculator steps. In addition, you should state the Brand and Model number of the calculator used on the title page.
All assignments should be typed and professionally presented. You can use Microsoft Word to complete your assignment and clearly label your questions to make marking easier. If the answer is a percentage, convert from decimal format to percentage. The explanations in discussion questions should be aimed at one brief paragraph to multiple paragraphs depending on the question.
If you use sources to support your decisions, you must use in-text referencing to properly acknowledge the work of the original author. The preferred referencing style is the Harvard referencing style (author-date).However, you are not expected to reference the formulae.
Do not round until the final answer is reached and then show answers to two decimal places. If the answer is a percentage, convert from decimal format to percentage.
Q1. Portfolio Valuation - General & Practical
In Assessment 1, you have used Yahoo7!Finance to determine holding period returns for BHP Billiton Ltd and Commonwealth Bank of Australia. In this assessment, you will gain further experience of using the resource.
Assume that you are acting as financial advisor for a firm. You have a client who wants to develop a share portfolio through investingin shares of BHP Billiton Ltd (symbol: BHP.AX), Commonwealth Bank of Australia (symbol: CBA.AX), and Myer Holdings Ltd (symbol: MYR.AX). The client has $10,000 to invest and is seeking your advice regarding the following investment choices.
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Investment Choice
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Percentage of $10000 invested in BHP.AX
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Percentage of $10000 invested in CBA.AX
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Percentage of $10000 invested in MYR.AX
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A
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30%
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35%
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35%
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B
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50%
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25%
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25%
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C
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35%
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25%
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40%
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Assume that expected return for all three companies' shares are the same as holding period returnsfor these sharesover the period 1 Jan 2015 - 30 Jun 2015 (the holding period returns are to be calculated based upon closing prices at these two dates and dividends attained between these two dates).
(a) Given these information and presuming expected return of the portfolio as your only selection criteria, which of the aboveinvestment choices will you advise the client to adopt?
(b) Suppose, you are also given the following (hypothetical) information:
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Share
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β
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BHP.AX
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0.97
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CBA.AX
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0.80
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MYR.AX
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2.00
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Also, assume that your client is risk-averse. Will your advice regarding the investment choices change due to the above-indicated information for β? Why or why not?
(c) If your client build up a portfolio through investing in many different companies' shares, will the client be able to completely eliminate risk for investing?Explain.
[NOTE:For this question, you need to refer to at-least three references. One of the references is the textbook; and the others can be any web based reference/textbook/journals/articles or other resources. The idea of this question is to encourage you to do a bit of research on relevant topics.]
Q2. Bond Valuation- General
Suppose Mr. M is considering investments into the bond market. He considers two bonds:
Bond A:
This bond has a face value of $100, and coupon of 8% paid annually. The bond matures in 10 years.
Bond B:
This is a zero-coupon bond, which also has a face value of $100 and matures in 10 years.Interest is compounded annually.
Given the above information:
(a) Determine the price of the bonds, if Mr. M's required rate of return is 8% p.a. for both bonds.
(b) Assume Mr. M's required rate of return is also the market rate of interest on similar bonds. Given this assumption, which of these bonds sells for a discount and which sells at par value?
(c) Suppose, Mr. M buys the zero coupon bond (Bond B C) now, which matures in 10 years, for $85. After a year, he sells the bond for $95. Determine the bond's yield to maturity (YTM) at the time when Mr. M buys it and at the time when he sells it.
Q3. Bond Valuation - Practical
Instructions
For this question, you will get both an experience of using computer software to solve financial problems and also using online resources in financial modelling. Indeed, most of the modern corporates employ some kind of software (and relevant finance functions) in relation to finance issues.
Excel:
A particular software possessing many finance function facilities is Microsoft Excel (which, as indicated on course profile, is one of the required IT resources). However, another option is OpenOffice Calc (which is an open-source and free software compatible to Excel). The OpenOffice Calc (part of Apache OpenOffice suit) may be downloaded from:
https://www.openoffice.org/download/index.html
The software you will need for this question is either Microsoft Excel or OpenOffice Calc (i.e., any one of these two). First, please note the following links to relevant documentations:
https://support.office.microsoft.com/en-AU/article/rate-function-9f665657-4a7e-4bb7-a030-83fc59e748ce (for Microsoft Excel)
https://wiki.openoffice.org/wiki/Documentation/How_Tos/Calc:_RATE_function
(for OpenOffice Calc)
The above links show the function to determine the interest rate per period (i/m), given present value (PV), future value (FV), payment (C), and total number of periods (m x n).
As for the symbols shown within brackets in the previous line, please note that these relate to the "Price of a bond making multiple payments each year" formula within the formula sheet.
Online resource:
Similar to share market, a small-scale bond market also exists in Australia. Please browse the ASX website on Treasury Bonds:
https://www.asx.com.au/asx/markets/interestRateSecurityPrices.do?type=GOVERNMENT_BOND
Please note the bonds, codes of which start with "GSB". Select any two of these treasury bonds, both of which has the face value of $100 and maturity date beyond 2016. For each of these bonds, please also note that the coupon rate, next payment dateand payment frequency.
The Problem to Solve:
For the two bonds you have selected, using either Microsoft Excel or OpenOffice Calc's RATE function, determine the YTM of the bondsif you purchase these bonds at the price of:
i. $85 on 21 Jan 2016
ii. $105 on 21 Oct 2016 [10 marks]
Q4. Share Valuation- General
Mr. Y is evaluating three different securities as potential investment:
Security A:
This is the preference share of MXM Ltd. The security pays a $5 dividend every year, in perpetuity. Mr. Y's requiredrate of return for this security is 8% p.a. The security is currently selling in the market at $70.
Security B:
This is the ordinary share of ABM Ltd. The security recently paida dividend of $8per share; it is expected that the dividends will continue to grow at a constant rate of 5%.Mr. Y's required rate of return for this security is 20% p.a.The security is currently selling in the market at $60.
Security C:
This is the ordinary share of BMB Ltd, a fast growing company. The company expects to grow at a rate of 25% in the first three years, and then by 10% for the next two years. Followed by this, the company is expected to settle to a constant growth rate of 7%. The first dividend is expected to be paid in year 2, and will be equal to $5. Mr. Y's required rate of return for this security is 17% p.a.The security is currently selling in the market at $40.
Given the above information:
(a) Determine the value of all the three securities to Mr. Y, given his required rates of return.
(b) Given the market price for the securities and the price determined in (a), outline (for each of the securities) whether Mr. Y will be willing to buy these securities at the given market prices?
(c) For both Security B and Security C, determine the expected price of the shares at the end of the 6th year.
(d) Discuss why share valuation is more difficult than bond valuation.