Introduction to Financial Management Group Assignment 2 2022-23 S2
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Introduction to Financial Management
Group Assignment 2
2022-23 S2
(1) Please submit the assignment via sub-class soul page.
(2) The deadline for the assignment is 25 April (Tuesday), 6pm. Late submission is subject to penalties as shown below:
Late by |
Marks deducted |
Up to 12 hours |
20% |
More than 12 hours |
50% |
More than 24 hours |
100% |
(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) Please clearly put down you and your group-mate class number, name and student ID on the front page of the assignment.
(6) 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.]
(7) Please make sure enough space is left between each sub-part of the question and each question to facilitate marking.
(8) Round your final answers to two decimals places.
(9) This assignment (50 marks in total) accounts for 12% of the course assessment.
Note: Correct answers 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 answers without calculations support will only receive a tiny fraction of mark
assigned for the question.
Question 1 (16 marks)
Bond XYZ is a $1,000, 4% semi-annual coupon bond issued today on 1 Jan 2023, maturing on 31 December 2032. Coupons are paid on every 30 June and 31 December.
(a) If you bought Bond XYZ today at a yield (YTM) of 3% compounded semiannually, what’s
your purchase price? Did you buy the bond at a premium, par or discount? (4 marks)
(b) One year later Bond XYZ’s yield went up to 5% compounded semiannually and you sold it
immediately after receiving the coupon.
i) Compute the bond’s current yield. (2 marks)
ii) Compute the bond’s one-year capital gains yield. (4 marks)
iii) Assume that you reinvested all coupons at 5% compounded semi-annually. Calculate the total amount of coupon income (coupon payments and reinvestment of coupon payments) at the end of the 1-year holding period. (3 marks)
iv) Based on the results from parts (bii) and (biii), calculate the Holding Period Yield for the investment horizon of 1 year (HPY1-year). (3 marks)
[Hint: In computing the 1-year HPY for the bond investment, you figured that the correct answer could not be found by simply adding up the current yield and the 1- year capital gains yield because the current yield, by definition, would fail to consider the reinvestment of the semi-annual coupons received during the year.]
Question 2 (9 marks)
(a) City Pacific Airlines has just paid a dividend of $2.50 per share. The company is expected
to increase its dividend by 8% next year before starting to reduce the growth rate by 2 percentage points every year (i.e., from 8% to 6% to 4% in each subsequent year) until it reaches the airline industry average of 2%, at which the growth rate will stayforever. What is the price of the stock today given the (yearly) required rate of return is 12%? (5 marks)
(b) Wonderland Inc. has just paid a dividend of $2.75 per share. The company has been
following a highly stable dividend growth policy (practically at a constant rate) for many years and is expected to do so in the foreseeable future. What will be the price of Wonderland’s stock five years from now if the market expects the company to pay a $2.86 dividend for next year and its equity cost of capital to be 11.7%? (4 marks)
Question 3 (25 marks)
Samuel, a fund manager, has $2,000,000 to invest on behalf of his client. He is interested in the ordinary shares of Co. X and Y Inc.
Expected rates of return for Stocks X and Y under different market conditions for the coming month (Dec 2022) are shown below:
State of Economy |
Probability |
Stock X |
Stock Y |
Boom |
0.3 |
23% |
-2% |
Normal |
0.5 |
15% |
10% |
Bust |
0.2 |
-3% |
12% |
(a) Calculate the expected rate of return and standard deviation of rate of return of Stock X and
Stock Y. (12 marks)
(b) Samuel plans to construct a portfolio consisting of 20,000 shares of Stock X and 10,000
shares of Stock Y. Stocks X and Y are currently trading at $60 and $80 respectively.
Calculate the weight of the Stock X and Stock Y in the portfolio. (3 marks)
(c) Calculate the expected rate of return and variance of the portfolio formed in part (b), given the covariance is -0.0018 (- 18%2). (6 marks)
(d) Samuel has collected the following market data:
- Risk-free rate: 4%
- Expected market return: 12%
- Beta of Stock Y: 1.8
i) Estimate the required rate of return on Stock Y using CAPM. (2 marks)
ii) Determine whether Stock Y is under, fairly or over-valued. (2 marks)
2023-04-22