The students can base their replies on wider research, even from the internet sources, however, all information should be appropriately referred using Business School’s referencing style. Although student’s quantitative analysis will be same, however, justification, use of theory, paper structure and background for recommendation is to be explained in detail for which you will get higher awards. Using the Turnitin will allow us to detect very easily copied answers.
Submission is required in MS Word or PDF format via Turnitin submission link in Week 7 Assessments (‘Cases I – Report’). MS Excel file, with all the solutions, is required to be uploaded via submission link in Week 7 Assessments (‘Cases I – Excel submission link’)
In MS Word/PDF document, Students must have a cover page, with name, Table of Contents, References and Appendix (if necessary)
4 questions are to be answered (please notice the weights in brackets assigned for each problem)
Question 1 (Introduction to Financial Management) (10%)
Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits. Please explain thi
s in the context of the company’s goals. Prepare a short (1
Question 2 (Time Value of Money) (20%)
In 2013 Bill Gates was worth about $28 billion after he reduced his stake in Microsoft from 21% to around 14% by moving billions into his charitable foundation. Let’s see what Bill Gates can do with his money in the following problems.
I’ll take Manhattan? Manhattan’s native tribe sold Manhattan Island to Peter Minuit for $24 in 1626. Now, 387 years later in 2013, Bill Gates wants to buy the island from the “current natives.” How much would Bill have to pay for Manhattan if the “current natives” want a 6% annual return on the original $24 purchase price? Could he afford it? (5 points)
How much would Bill have to pay for Manhattan if the “current natives” want a 6% return compounded monthly on the original $24purchase price? (5 points)
Microsoft Seattle? Bill Gates decides to pass on Manhattan and instead plans to buy the city of Seattle, Washington, for $60 billion in 10 years. How much would Mr. Gates have to invest today at 10 percent compounded annually in order to purchase Seattle in 10 years? (5 points)
Now assume Bill Gates wants to invest only about half his net worth today, $14 billion, in order to buy Seattle for $60 billion in 10 years. What annual rate of return would he have to earn in order to complete his purchase in 10 years? (5 points)
Question 3 (Time Value of Money) (20%)
Yang Ming Marine Transport Corporation is considering the purchase of a new bulk carrier for $8 million. The forecasted revenues are $5 million a year and operating costs are $4 million. A major refit costing $2 million will be required after both the fifth and tenth years. After 15 years, the ship is expected to be sold for scrap at $1.5 million.
What is the NPV if the opportunity cost of capital is 8%? (10 points)
Should the company accept the purchase of the carrier? (10 points)
Question 4 (Risk and Return) (50%)
The data below presents monthly closing prices of Standard & Poor’s 500 Index, Wal-Mart, and Target to calculate the holding-period returns for the 24 months from May 2013 through May 2015
2013 May June
July August September October November December
2014 January February
July August September October November December
2015 January February
March April May
1.631 74,84 1.606 74,49 1.684 77,94 1.633 72,98 1.682 73,96 1.757 76,75 1.806 81,01 1.848 78,69 1.783 74,68 1.859 74,70 1.872 76,43 1.884 79,71 1.924 76,77 1.960 75,07 1.931 73,58 2.003 75,50 1.972 76,47 2.018 76,27 2.068 87,54 2.059 85,88 1.995 84,98 2.105 83,93 2.068 82,25 2.086 78,05 2.182 75,86
69,50 68,86 71,25 63,31 63,98 64,79 63,93 63,27 56,64 62,54 60,51 61,75 56,76 57,95 59,59 60,07 62,68 61,82 74,00 75,91 73,61 76,83 82,07 78,83 79,29
Use the price data from the table (use the excel available in week 7) for the Standard & Poor’s 500 Index, Wal-Mart, and Target to calculate the holding-period returns for the 24 months from May 2013 through May 2015. Calculate the average monthly holding-period returns and the standard deviation of these returns for the S&P Index, Wal-Mart, and Target. Please compare the results obtained for these three series. (15 points)
Plot (1) the holding-period returns for Wal-Mart against the Standard & Poor’s 500 Index, and (2) the Target holding-period returns against the Standard & Poor’s 500 Index. From your graphs, describe the nature of the relationship between stock returns for Wal-Mart and the returns for the S&P 500 Index. Make the same comparison for Target. (5 points)
Assume that you have decided to invest one-half of your money in Wal-Mart and the remainder in Target. Calculate the monthly holding-period returns for your two-stock portfolio.
(The monthly return for the portfolio is the average of the two stocks’ monthly returns.) Plot
the returns of your two-stoc
k portfolio against the Standard & Poor’s 500 Index as you did for
the individual stocks in part b. How does this graph compare to the graphs for the individual stocks? Explain the difference. (10 points)
Make a comparison of the average returns and the standard deviations for all the individual assets and the portfolio that was created. What conclusions can be reached by your comparison in the context of the risk and return? (5 points)
According to Standard & Poor’s, the betas for Wal-Mart and Target are 0.28 and 0.75, respectively. Compare the meaning of these betas relative to the standard deviations calculated above. Answer the question in the context of the systematic and unsystematic risk. (5 points)
The Treasury bill rate at the end of May 2015 was 3%. Given the betas for Wal-Mart and Target and using the above data for the S&P Index as a measure for the market portfolio expected return, estimate an appropriate required rate of return, using the CAPM model and given the level of systematic risk for each stock. You need to convert the monthly average S&P500 return into annual terms simply by multiplying by 12. What do you conclude? (10 points)
Word count: total: no max word words. Structure of the Report:
Cover page: The first page must contain the full name of the student, the logo of the school as well as the name of the course and the name of the professor.
The Table of Contents
Body of the Report
Bibliography: You should use the Harvard Referencing System.
It assesses the following learning outcomes:
Outcome 1: understand the basic theories of finance and apply these to practical problems;
Outcome 2. analyze series of future cash flows and recommend choices for investment
Outcome 3: describe the relationship between risk and return and apply methods and
techniques of risk and return measurement;
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