how much is the price?

Assessment 1 - Assignment

Unit: FIN201 – Corporate Finance

Total Marks: This assignment is worth 30 marks (30 % of the total marks in the unit).

Instructions:

• Students are required to cover all stated requirements.

• Your answer must be both uploaded to Moodle in word file and handed over a printed copy.

• You need to support your answers with appropriate Harvard style references where necessary.

• Include a title/cover page containing the subject title and code and the name, student id numbers.

• Please save the document as FIN201AT1_first name_Surename_Student Number Eg: FIN201AT1_John_Smith_NA20170000

Each of the following question worth 10 marks, please answer all of them. If needed please use Harvard referencing style. There is no word limit, but it is necessary that you provide answers with explanations.

Question 1: (10 marks)

1. If you deposit $100 in one year, $200 in two years, and $300 in three years, how much will you have in three years? How much of this is interest? How much will you have in five years if you do not add additional amounts? Assume a 7% interest rate throughout. (3 marks)

2. Bond has a face value of $100 with coupon rate of 14% paid semi-annually; the yield to maturity is 16%. What is the bond price? What is the effective annual yield on this bond? (3 marks)

3. What is the expected return on this portfolio? What is the beta of this portfolio? Does the portfolio have more or less systematic risk than an average asset? (4 marks)

Security Amount invested Expected return Beta

Share A $1000 8% 0.8

Share B $2000 12% 0.95

Share C $3000 15% 1.10

Share D $4000 18% 1.40

Question 2: (10 marks)

Standard deviation Beta

Security A 40% 0.5

Security B 20% 1.5

1. Which security has a greater total risk? Explain. (2marks)

2. Which security has greater systematic risk? Explain. (2marks)

3. Can diversification eliminate systematic risk? Explain. (2marks)

4. The security market line (SML) is used to describe the relationship between systematic risk and expected return. If an investment has a positive NPV, would it plot above or below the SML? Explain. (4 marks)

Question 3: (10 marks)

The Star Company has a WACC of 20%. The cost of debt is 12%, which is equal to the risk-free rate of interest. If Star’s debt to equity ratio is 2, Star’s equity beta is 1.5.

a) What are the M&M propositions I, II and III, please use graphs/charts and words to explain. (7marks)

b) Based on the M&M proposition II, what is the beta of the entire firm? What is the cost of equity capital? (3 marks)

Assessment 1 - Assignment

Unit: FIN201 – Corporate Finance

Total Marks: This assignment is worth 30 marks (30 % of the total marks in the unit).

Instructions:

• Students are required to cover all stated requirements.

• Your answer must be both uploaded to Moodle in word file and handed over a printed copy.

• You need to support your answers with appropriate Harvard style references where necessary.

• Include a title/cover page containing the subject title and code and the name, student id numbers.

• Please save the document as FIN201AT1_first name_Surename_Student Number Eg: FIN201AT1_John_Smith_NA20170000

Each of the following question worth 10 marks, please answer all of them. If needed please use Harvard referencing style. There is no word limit, but it is necessary that you provide answers with explanations.

Question 1: (10 marks)

1. If you deposit $100 in one year, $200 in two years, and $300 in three years, how much will you have in three years? How much of this is interest? How much will you have in five years if you do not add additional amounts? Assume a 7% interest rate throughout. (3 marks)

2. Bond has a face value of $100 with coupon rate of 14% paid semi-annually; the yield to maturity is 16%. What is the bond price? What is the effective annual yield on this bond? (3 marks)

3. What is the expected return on this portfolio? What is the beta of this portfolio? Does the portfolio have more or less systematic risk than an average asset? (4 marks)

Security Amount invested Expected return Beta

Share A $1000 8% 0.8

Share B $2000 12% 0.95

Share C $3000 15% 1.10

Share D $4000 18% 1.40

Question 2: (10 marks)

Standard deviation Beta

Security A 40% 0.5

Security B 20% 1.5

1. Which security has a greater total risk? Explain. (2marks)

2. Which security has greater systematic risk? Explain. (2marks)

3. Can diversification eliminate systematic risk? Explain. (2marks)

4. The security market line (SML) is used to describe the relationship between systematic risk and expected return. If an investment has a positive NPV, would it plot above or below the SML? Explain. (4 marks)

Question 3: (10 marks)

The Star Company has a WACC of 20%. The cost of debt is 12%, which is equal to the risk-free rate of interest. If Star’s debt to equity ratio is 2, Star’s equity beta is 1.5.

a) What are the M&M propositions I, II and III, please use graphs/charts and words to explain. (7marks)

b) Based on the M&M proposition II, what is the beta of the entire firm? What is the cost of equity capital? (3 marks)

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