Business Finance
BAO5534
Assignment Semester 2 2013


Introduction
The focus of this assignment is on risk, return and equity analysis. The expectation is that students will develop skills in measuring returns, risk assessment and analysis and valuation. Students are required to use the data provided in the case problem and exhibits to answer a series of questions.

Assignment Components
The exhibits contain financial information on Pharmacy Industries Ltd and Mail Services Ltd. It also contains return information and dividend information for both companies and the stock market index. There is also annualized return information relating to Treasury bills.


Required:
You will be required to complete this assignment in teams of three (3). It is important that you form your teams as soon as possible.

Please note that under NO circumstances will we allow assignments to be submitted by individuals (This is a group assignment).

Note that marks will be deducted for poor presentation. Assignments should be stapled in the top left hand corner. Please do not submit assignments in folders. It is also a requirement that all assignments be submitted with a cover sheet. This cover sheet is now specific to this subject and a copy is provided on WebCT. Assignments will not be accepted or marked if they are lodged without this cover sheet.

The assignment requires each team to undertake independent work. No further assistance will be provided to teams in completing the assignment.

The assignment accounts for 15% of the subject’s assessment.



Assignment Presentation
• Students are expected to complete the calculations to the questions in the assignment. This will require the development of a spreadsheet and the creation of formulas. The excel specialist functions cannot be used to calculate any answers. You are required to develop your own formulas, within the spreadsheet, to complete all the necessary calculations. The answers to your questions can be presented on a word document with the supporting excel spreadsheet calculations clearly referenced in an appendix.
• Do not submit your assignment in folders.
• NOTE: Your answers should be clearly labeled on an answer sheet(s) by reference to the question number, with any further supporting calculations referenced to an appendix.

Assignment Submission
The assignment must be submitted with a signed assignment cover sheet to your Lecturer on Wednesday 9 October 2013. Late submissions will be penalised at 2 marks for each day the assignment is overdue.


Exhibit 1: Historical monthly share price data for two traded securities (Pharmacy industries and Mail services) and monthly data relating to the market index.

Month Market index (points) Pharmacy Industries Ltd ($) Mail
Services Ltd ($) Treasury Bills – Annualised rates of Return (%)
May 2011 928. 59.69 45.04
June 876 57.00 43.37 4.50
July 854. 55.73 44.70 4.66
August 834 52.50 42.47 4.62
September 864 53.01 43.60 4.47
October 917 53.95 44.58 4.13
November 953 54.65 45.25 4.12
December 981 56.56 50.02 4.03
January 2012 989 57.62 51.22 4.36
February 999 58.71 51.93 4.22
March 1002 59.23 50.77 4.13
April 1049 60.01 50.82 4.36
May 1055 61.05 50.02 4.50
June 1108 63.33 46.41 4.20
July 1131 64.56 53.70 4.01
August 1142 63.18 54.41 3.94
September 1123 61.92 58.75 4.29
October 1118 63.45 53.75 4.02
November 1120 64.67 51.93 4.33
December 1134 67.23 55.69 4.56
January 2013 1099 69.27 53.51 4.50
February 1102 67.98 54.97 4.39
March 1111 68.47 54.75 4.53
April 1125 69.89 54.40 4.55
May 1180 66.66 52.01 4.86

Exhibit 2
Dividend History: Annual dividends paid for the last 6 years.
Pharmacy Industries Ltd Mail Services Ltd
$2.00 $1.55
$2.00 $1.60
$2.05 $1.65
$2.05 $1.70
$2.10 $1.75
$2.11 $1.80


Questions
Your team has been instructed to answer all of the following questions:
1. Use the price data in Exhibit 1 for the Market index, Pharmacy Industries Ltd and Mail Services Ltd to calculate the holding-period returns for the 24 months ending May 2011.
2. Calculate the average monthly holding-period return and standard deviation of these returns for the Market index, Pharmacy Industries Ltd and Mail Services Ltd. Use an arithmetic average and the data provided in Exhibit 1.
3. Assume that your team has decided to invest one-half of your wealth in Pharmacy Industries Ltd and the remaining amount in Mail Services Ltd. Calculate an annualised average holding-period return for your two-share portfolio. (Hint: The monthly return for the portfolio is the average of the two shares’ monthly returns.)
4. Determine the standard deviation of a two asset portfolio comprised of Pharmacy Industries Ltd and Mail Services Ltd shares. Assume equal weightings of each share within the portfolio. What happens to total risk when you combine shares into a portfolio?
5. Use the numbers in Exhibit 1 to determine the systematic risk (Beta) of Pharmacy Industries Ltd and Mail Services Ltd. What is beta?
6. Which measure, beta or standard deviation, is more useful when analyzing stocks that are placed in a diversified portfolio? Explain.
7. Use the capital asset pricing model to calculate the required rate of return for both Pharmacy Industries Ltd and Mail Services Ltd. Use the Treasury bill data in Exhibit 1 to determine an annual average for the risk-free rate of return. What is the purpose of calculating the required rate of return for these investments?
8. Utilising the required rates of return calculated in Question 7 above and the historical dividend information in Exhibit 2, calculate the intrinsic value for both Pharmacy Industries Ltd and Mail Services Ltd. (Hint: It is reasonable to assume constant growth in future dividends). Use an annual compounded average rate of return when calculating the historical growth rate in dividends. Please note the assumptions your team has made when calculating intrinsic value.