1.

a) Consider the following companies:

Group  1: Walmart, Coca Cola, The  Home  Depot, The Procter & Gamble

Group 2: Tesla, Apple, Pfizer, Microsoft

Select one company from Group  1 and one company from Group 2 and compare their capital structure using the total debt to total assets ratio (e.g., total debt divided by total assets) for the year 2022. Is the result as expected? Explain.

To answer this question, please use the yahoo finance webpage https://finance.yahoo.com/  or  the  EDGAR  database https://www.sec.gov/edgar/search-and-access,  search  the  name  of each company you chose, go to the financials section, and analyse their balance sheets to construct the ratio. Limit your answer to 300 max. [25 marks]

b) Southampton  Manufacturers  LTD  is all-equity financed and has the following information:

EBIT = £20,000, re  = 0.05. Then, the company decides to issue £200,000 in debt. The cost of debt, rd , is 0.03. Ignore corporate taxes. What is the company’s capital structure and cost of capital (WACC) after the restructuring? Show your calculations and refer to the relevant Modigliani & Miller Theorem. [13 marks]

c) Assume   now  that   Southampton   Manufacturers   LTD operates in an environment with taxes of 0.20. What is the wealth of the shareholders after the restructuring? [12 marks]

2.

a) It has been observed that, oftentimes, investors include in their portfolios not only traditional assets such as stocks and bonds, but also gold. Why would an investor include gold in the portfolio? Explain.

Please use sources from the web to justify your answer and cite them throughout the answer (don’t create a list of references in the end). Limit your answer to 300 words max. [25 marks]

b) Below are the characteristics of stocks A and B:

The correlation, ρ , between the two stocks is 0.50.

Moreover, the US government bond’s return, as a proxy  for the riskless asset, is 0.05 and the return of the market portfolio, proxied by the S&P 500 index, is 0.13. The standard deviation of the S&P 500 index is 0.20.

Based on the above information answer the following:

i)  What is the expected return of each stock? [5 marks]

ii) Suppose you want to create a portfolio,” P”, by investing your money in the two stocks. What are the weights you should invest in each stock such that the expected return of the portfolio is equal to 0.12? What is the variance of the portfolio? [10 marks]

iii) Suppose this time you want to create a new portfolio, “Q”, by investing your money in the S&P 500 index    and the US government bond. What are the weights you should invest in the S&P 500 index and the bond such that the expected return of portfolio “Q” is equal to the expected return of portfolio “P”? Assume zero correlation between the index and the bond. [5 marks]

iv) Show how portfolio “Q” is more efficient than portfolio “P” . [5 marks]

3.

a) Can you use the Altman’s Z-score model with the five financial ratios to evaluate the credit worthiness of     banks? Explain.

Please use sources from the web to justify your answer and cite them throughout the answer (don’t create a list of references in the end). Limit your answer to 300 words max. [25 marks]

b) Consider the following information for Company A:

i) Compare the company’s credit worthiness in the years 2019 2020. [15 marks]