SEMESTER I EXAMINATION – 2016
Academic Year – 2015/16 BBS46-Bachelor of Business Studies (Singapore) (Part-Time)Investment and portfolio management(FIN 3001S)Professor Joel MetaisProfessor Don BredinDiana Tan*Time Allowed: 3 HoursInstructions for CandidatesAnswer four (4) questions.
All questions carry the same marks.
Students are allowed to use calculators.
Question 1 a) Suppose you invest $158,000 and buy 2,000 shares of SMM at $25 per share and 3,000 shares of PNN at $36 per share.
If SMM’s stock goes up to $33 per share and PNN stock falls to $32 per share and neither paid dividends.
i) What is the new value of the portfolio? (3 marks)
ii) What return did the portfolio earn? (3 marks)
iii) If you don’t buy or sell any shares after the price change, what are the new portfolio weights? (3 marks)
- Jaslin plans to construct a portfolio consisting of only two equity investments in TTT and SMM ordinary shares. From her research, she finds out that these two investments have a correlation coefficient of -0.389
She plans to invest 80% in share SMM and the remaining in share TTT. The following are additional information collected in respect of these two investments:
| Share TTT | Share SMM |
| Standard deviation: | 13.39% | 8.16% |
| Mean return: | 9.10% | 5.96% |
Based on the portfolio investment information given above, you are required to compute the
- portfolio returns (2 marks)
- portfolio risk (4 marks)
- Discuss the advantages of diversification and the determinants of:
- portfolio risk and
- portfolio return. (10 marks)
Question 2
a)
You buy on January 1, 2013, a 2010 US Treasury bond, with a coupon rate of 4% and a face value of $1,000. The discount rate is 2.5%, which is the interest rate offered by other medium-term US Treasury bonds on 1 January 2013.
The interest payments perceived at the end of years 2008 and 2009 are $40. At the maturity date (end of 2010), the government pays the principal ($1,000) plus the interest ($40).
Find out the value of the coupon bond. (5 marks)
- At the end of June 2007 a UK corporate bond has an annual coupon rate of 3%, par (face) value of £5,000 and will mature in June 2010. Similar UK government bonds have an annual interest rate of 3.5%. Using the data given above and assuming semi-annual coupons, calculate the value of the corporate bond. (5 marks)
c) Discuss the determinants of the market price of convertible bond. (6 marks)
d)Explain the following type of bonds:
- Foreign bond
- Eurobond
- Indexed bond (9 marks)
Question 3 - Critically discuss the active strategy in managing the equity portfolio and explain the following strategies clearly.
- Top-Down versus Bottom-Up Approaches
- Three Generic Themes
- The 130/30 Strategy
- Contrarian Investment Strategy
- Price Momentum Strategy
(15 marks)
- Critically discuss the core-plus management strategies and matched-funding strategies for bond portfolio management. (10 marks)
Question 4 - You own 200 shares of Winter Company’s preference shares, which currently sells for $40 per share and pays annual dividends of $3.40 per share
i) what is your expected rate of return? (2 marks)
ii) if you require an 8% return, given the current price should you recommend to sell
or buy more shares? Justify your investment recommendation. (4 marks)
b) PBB Company needs to raise €5.50 billion of new equity. The market price is €77.40/ share. Lafarge decides to raise additional funds via a 1 for 10 rights offer at €65.40 per share.
i) find out the theoretical ex-right price if the right issue is 1 for 4 $2 per share and cum rights price of $ per share. (3 marks)
ii) If we assume 100% subscription, what is the value of each right? (3 marks)
- Discuss the features of rights issues and its advantages:
- to the company
- to the shareholders (8 marks)
d) What are the similarities and differences between rights issue and bonus issue? (5 mark)
Question 5a) Discuss the following foreign exchange derivatives in which investor can engage in hedging for their foreign investment.
- foreign exchange forward
ii) foreign exchange future
- foreign exchange options (15 marks)
b) Survey results appear to support the notion of widespread use of derivatives among large publicly traded firms. For example, AIG, the largest insurance company in the world, was on the verge of collapse because it had sold roughly $500 billion worth of credit default swaps (CDS).
What functions does credit default swap serve and how did it influence the Global Financial Crisis 2008?
(10 marks)
Question 6The financial statements of Everest , a company with limited liability for the years ended 31 May 2013 and 31 May 2014 are summarized below.
Balance sheets as at
31 May XXXXXXXXXXMay 2014
$000 $000 $000 $000
Non current assetsAt cost 4,600 5,600
Accumulated depreciation XXXXXXXXXX,000)
––––––– 3,800 ––––––– 4,600
Current assetsInventory 6,000 6,700
Receivables 4,400 6,740
Bank XXXXXXXXXX
––––––– 10,520 ––––––– 14,400
––––––– –––––––
14, XXXXXXXXXX,000
––––––– –––––––
Capital and reservesIssued share capital 8,000 8,000
Accumulated profit 3,120 5,300
––––––– –––––––
11, XXXXXXXXXX,300
Non-current liabilities7% Loan notes – 1,500
Current liabilities 3,200 4,200
––––––– –––––––
14, XXXXXXXXXX,000
Income statements for the years ended
31 May XXXXXXXXXXMay 2014
$000 $000 $000 $000
Revenue 20, XXXXXXXXXX,000
Cost of sales (15, XXXXXXXXXX,050)
––––––– –––––––
Gross profit 4,600 4,950
Expenses:
Administrative XXXXXXXXXX)
Selling and distribution (1, XXXXXXXXXX,565)
Depreciation XXXXXXXXXX)
Loan note interest – (105)
––––––– –––––––
(2, XXXXXXXXXX,770)
––––––– –––––––
Net profit 2,140 2,180
–––––––– ––––––
Additional Information
During 2014 Everest issued loan notes of $1,500,000 at 7% per annum to fund the expansion of the business. The additional cash was received on 1 June 2014.
| Year 2013 | Year 2014 |
| Gross profit margin | 23·00% | 19·04% |
| Net profit margin | 10·70% | 8·38% |
| Return on equity | 19·24% | 16·39% |
| Inventory turnover | 2·57 times | 3·14 times |
| Quick ratio | 1·41 :1 | 1·83 :1 |
| Receivables period | 80·30 days | 94·62days |
Required:
(a) Based on the financial information given above, evaluate the company’s financial performance. What is your investment decision? Justify. (20 marks)
(b) What further information would be helpful in making investment decision?
(5 marks)
~ End of Paper ~Finance Formulae Sheet - Growth rate = ROE x (retention rate) = I x (retention rate)
- Return on equity, ROE = Net profit after tax / Shareholder’s equity
- Present value of a perpetuity = C / i
- NPV = C0 + C1 / (1+r)1 + C2 / (1+r)2 + C3 / (1+r)3 + … + Cn / (1+r)n
- NPV = C0 + C1 / (1+IRR)1 + C2 / (1+IRR)2 + … + Cn / (1+IRR)n = 0
- Expected NPV = å w i x NPV i
- Profitability Index = PV(Future Cash Flows) / PV (Investment outlay)
- Profitability Index = 1 + [NPV / PV (Initial outlay)]
- Accounting rate of return = [Average profit x 100] / Average Investment
- Accounting rate of return = [Average accounting profit x 100] / Initial outlay
- PV ( 1 + i ) n = FV. I = ( FV / PV)^ 1/n - 1
- FV = PV (1+i) n . Annuity FV = PMT { [ ( 1 + i )n– 1 ] / i }
13. PV = FV (1+i)
-n . Annuity PV = PMT { [ 1 – ( 1 + i )-n] / i }
- PV of an annuity = Fixed sum x (PV Annuity Factor for n periods at i % )
- Bond price = Coupon(PVIFA, n periods @ i% XXXXXXXXXXPVIF, n periods @ i%)
- Approximate i = C + [(Par - Price) / n]
(Par + Price) / 2
- SML equation: E(Ri) = RF + ( Rm - RF ) x beta i
Covariance:
- Covariance between Asset A and Asset B
= (correlation coefficient between Asset A and Asset B) ( sA) ( sB)
- Expected portfolio return = S (w i ) x E(r i)
- Beta of A = r (A,M) x sA x sM/ [sM x sM]
- Portfolio variance, sp2 = wA2sA2 +wB2 sB2 + 2(wA)(wB)(r A,B)sAsB
- MM'S PROPOSITION II (with taxation): rE = rA + (rA – rD) x (D/E) (1-T)
- VL= VU+ TD
- Equity beta, ßL = ßu x [ XXXXXXXXXXT) x D / E]
- Asset beta:
- Price-earnings ratio = Market price per share / earnings per share
- WACC = [rD x ( 1 – TC ) x (D/V)] + [rP x (P/V)] + [rE x (E/V)]
- Gordon’s constant growth Dividend Discount Model: Po = D1 / (k –g )
- Spot exchange rate = (1 + r Base currency)
Forward exchange rate (1 + r Quote currency)