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Corporate Finance BAO2001 Assignment Semester 1 2018 Introduction The focus of this assignment is on Risk and Return. The expectation is that students will develop technical skills in measuring...

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Corporate Finance

BAO2001

Assignment Semester 1 2018


Introduction

The focus of this assignment is on Risk and Return. The expectation is that students will develop technical skills in measuring returns, risk assessment and analysis. Students are required to use the data provided in the case problem and exhibits to make various calculations with the view of producing a 700 word report.


Assignment Components

The exhibit contains monthly returns for Financial Ltd, Construction Ltd and the Stock Market index.


Assignment Weighting

This assignment accounts for 10% of the subject’s assessment.


Guidelines for the Assignment


  • Excel functions should be used to completeallstatistical calculations.


  • The standard of your presentation will be assessed and marked.


  • Evidence of your team’s breadth and depth of research will be assessed.


  • You need to reference. Marks will be deducted from assignments that fail to reference. (Use Harvard Referencing)


  • There is an expectation that each team of three will work collectively and in corroboration rather than independently when completing this assignment. As members of a team you are all jointly responsible for the contents of your assignment.


Due date: Refer to the unit Guide for submission date. An assignment drop box will be set-up in VU collaborative.


Also note that students have to complete this assignment in teams three. Assignments submitted by individuals will NOT be accepted. This assignment requires each group to undertake independent research. No further assistance will be provided to student groups in completing the assignment.

Table 1: Monthly Values for the Market Index and Two Traded Shares.


Month

Market index

Financial Ltd ($)

Construction Ltd ($)

1

4650

13.05

8.00

2

4770

13.40

7.60

3

4840

13.87

7.00

4

4940

13.12

7.70

5

4815

13.37

8.10

6

4788

13.00

8.60

7

5055

13.50

8.30

8

5125

13.90

8.90

9

5035

14.12

9.70

10

5115

14.87

10.20

11

5200

15.25

10.65

12

5255

16.05

11.05

13

5305

16.40

11.45

14

5408

16.00

10.95

15

5510

16.25

10.55

16

5430

16.50

11.00

17

5360

17.00

10.55

18

5420

17.35

10.10

19

5490

18.00

10.70

20

5555

18.35

9.45

21

5500

18.55

10.12

22

5575

19.20

10.45

23

5645

18.70

10.05

24

5695

18.20

10.85

25

5770

18.75

11.15




Table 2: Previous 5-year Dividend History for the two Listed Companies


Financial Ltd

Construction Ltd

1.00

0.60

1.03

0.62

1.07

0.66

1.11

0.70

1.15

0.74


Tasks

Each team is required to make the following calculations using the statistical functions on Excel:


  1. Convert the price data into returns on a month to month basis. You should have 24 returns for the market and the two shares after you complete this process.

  2. Mean (expected) return and standard deviation for the stock market and the two companies.

  3. The coefficient of variation for the market and the two companies.

  4. The correlation coefficient between Financial and Construction Ltd.

  5. The standard deviation of returns for a portfolio consisting of Financial Ltd and Construction Ltd (assume equal weightings).

  6. Beta coefficient calculation for both Financial and Construction Ltd

  7. Assuming a risk-free rate of 3% and utilizing the information in both tables use the dividend valuation model to determine the present value of the two shares.


REPORT

Your team is also required to produce an approximately700 wordreport that comments of the results calculated above. The report will need to refer to each statistic calculated and interpret the result and make comparisons amongst the market index and the two companies. Your team is required to specifically address what each statistic is actually measuring and its implications from arisk and returnviewpoint. You will also need to focus on the impact of creating a portfolio of two shares and the implications for risk reduction (You will need to providesome quantitativeevidenceof risk reduction). Furthermore, the Beta of each company needs to assessed and interpreted in the context of asset pricing. Finally, calculate the present value of each share by determining the required rate of return (CAPM) and then utilizing the dividend growth model.


Answered Same Day May 29, 2020 BAO2001

Solution

Shakeel answered on May 30 2020
110 Votes
The monthly return on stocks of Market index, Financial ltd and Construction ltd are calculated by using the formula (Pt - Pt-1) / Pt-1.
The result is given in the following table -
    Monthly return
    Month
    Market index
    Financial Ltd
    Construction Ltd
    1
    0.0258
    0.0268
    -0.0500
    2
    0.0147
    0.0351
    -0.0789
    3
    0.0207
    -0.0541
    0.1000
    4
    -0.0253
    0.0191
    0.0519
    5
    -0.0056
    -0.0277
    0.0617
    6
    0.0558
    0.0385
    -0.0349
    7
    0.0138
    0.0296
    0.0723
    8
    -0.0176
    0.0158
    0.0899
    9
    0.0159
    0.0531
    0.0515
    10
    0.0166
    0.0256
    0.0441
    11
    0.0106
    0.0525
    0.0376
    12
    0.0095
    0.0218
    0.0362
    13
    0.0194
    -0.0244
    -0.0437
    14
    0.0189
    0.0156
    -0.0365
    15
    -0.0145
    0.0154
    0.0427
    16
    -0.0129
    0.0303
    -0.0409
    17
    0.0112
    0.0206
    -0.0427
    18
    0.0129
    0.0375
    0.0594
    19
    0.0118
    0.0194
    -0.1168
    20
    -0.0099
    0.0109
    0.0709
    21
    0.0136
    0.0350
    0.0326
    22
    0.0126
    -0.0260
    -0.0383
    23
    0.0089
    -0.0267
    0.0796
    24
    0.0132
    0.0302
    0.0276
The average monthly return and standard deviation on monthly returns are as follows:
     
    Market index
    Financial Ltd
    Construction Ltd
    Mean return
    0.0092
    0.01558
    0.01564
    Std. Deviation
    0.0169
    0.0275
    0.0596
The mean monthly returns of Construction ltd and Financial ltd are almost same while the mean monthly return on Market index is 0.92%. Construction ltd has highest standard deviation (risk) of 0.0596 followed by Financial ltd at 0.0275 and market index at 0.0169. Thus, Construction ltd has highest monthly return over risk.
The co
elation coefficient between stocks and market index are given the following table -
    
    Market index
    Financial...
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