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Module Name: Business Finance (BSc (Hons) Business Management - Year 2 Semester 1 (Cohort 14 B - General)
Lecturer’s Name: Ms Leenshya GUNNOO
Date of Submission: 3rd session (10.10.2020)
Total Marks: 30 marks Word limit: 1500-2000
Assignment question-Answer all questions
The Board of Directors of ABC Co Ltd has assigned you the task of analysing the Discounted Cash Flow (DCF) technique for appraising large investment decisions.
Write a report to them giving your observations. (10 marks)
Discuss why diversification is important as risk management strategy within a portfolio of investment. (6 marks)
Suppose the current risk-free is 7.6 percent. P Inc. stock has a beta of 1.7 and an expected return of 16.7 percent. (Assume the CAPM is true)
a. What is the risk premium on the market? (2 marks)
b. M Industries stock has a beta of 1.8. What is the expected return on the M stock? (2 marks)
Company XYZ is considering an investment of $100,000. The useful life of the project is 10 years. The cut off period is three (3) years. The board of directors has identified two alternatives A and B. The expected annual cash flows are as follows:
Cost or Cash Flow Alternative A Alternative B
Initial cost ($100,000) ($100,000)
Cash flow year 1 35,000 35,000
Cash flow year 2 28,000 35,000
Cash flow year 3 32,000 35,000
Cash flow year 4 40,000 35,000
i. Calculate the payback period for Alternative A and Alternative B (5 marks) Marks shared equally for Alternative A and B
ii. Briefly explain which alternative should be selected based on the payback method. (2 marks)
iii. What are the limitations of using such a method (payback method) to appraise investment? (3 marks)