Finance and Investment Solutions - Comprehensive Assignment

This document contains comprehensive solutions to a finance and investment assignment, addressing various financial concepts and calculations. The assignment includes multiple-choice questions on topics such as behavioral finance biases, along with detailed solutions involving calculations of expected returns, YTM (Yield to Maturity) for a bond, and expected interest rates. The solution also includes calculations for stock valuation using dividend growth models, FCFE (Free Cash Flow to Equity) valuation, and the application of CAPM (Capital Asset Pricing Model) to determine the cost of equity and stock beta. Furthermore, the document analyzes financial statements to derive equity and current asset values. The provided solutions offer a complete breakdown of the methodologies and formulas used, providing a valuable resource for students studying finance and investment.

FINANCE AND INVESTMENT
STUDENT ID:
[Pick the date]

Question 1 – Option C
Question 2 – Option C
Question 3– Option B
Question 4 – Option D
Question 5 – Option B
Question 6 – Option A
Question 7 – Option B
Question 8 – Option C
Question 9 – Option C
Question 10 – Option D
Question 11- Option C
Question 12 – Option D
Question 13
Mental accounting – Option C
Representativeness Bias – Option A
Framing Bias – Option D
Regret Avoidance – Option B
Loss Aversion – Option E

Question 14
The excess returns on the market and the two stocks have been computed as underlying
below.
The regression output for S1 stock excess returns with regards to the market excess returns is
highlighted below.
From the above, it is evident that alpha is 0.041% while beta of the stock is 0.602.
The regression output for S2 stock excess returns with regards to the market excess returns is
highlighted below.

From the above, it is evident that alpha is 0.052% while beta of the stock is 0.091.
Question 15
Average market returns based on data provided in question 14 = 5.60% p.a.
Average risk free rate = 0.35% p.a.
Beta of security 1 = 1.1
Beta of security 2 = 0.95
Expected return on security 1 = 0.35 +1.1*(5.6-0.35) = 6.13%
Expected return on security 1 = 0.35 +0.95*(5.6-0.35) = 5.34%
Difference in expected returns (S1 – S2) = 6.13% - 5.34% =0.79% p.a.
Question 16
Annual coupon on bond = (4/100)*1000 = $ 40

However, the above would be adjusted for inflation owing to which the actual coupons for
the three years would be as follows.
Coupon received (Year 1) = 40*1.03 = $ 41.2
Coupon received (Year 2) = 40*1.03*1.04 = $ 42.85
Coupon received (Year 3) = 40*1.03*1.04*1.05= $44.99
The YTM for the bond can be estimated using the following equation.
1030 = 41.2/(1+YTM) + 42.85/(1+YTM)2 + 1044.99/(1+YTM)3
Solving the above, we get YTM = 3.23% p.a.
Question 17
Based on the given data, the relevant computations are shown below.
Expected interest rate after two years = 6.75%
Expected interest rate after three years = 7%
Hence one year interest rate after two years = [(7/6.75)-1]*100 = 3.70%
Question 18
Current year dividend = $ 3.25
Next year dividend = 3.25*1.08 = $ 3.51
Let the cost of equity be k%
Hence, 80 = 3.51/(k-0.08)
Solving the above, we get k = 12.39% p.a.
In order to compute the value of stock beta, CAPM approach would be used as shown below.
12.39% = 4% + Beta *(12%-4%)

Solving the above, we get stock beta = 1.048
Question 19
FCFE= FCFF + Debt – Interest* (1-tax)
FCFE = 205 + 25 -22*(1-0.35) = $215.7
Let the cost of equity be k% p.a.
Then, 2500 = (215.7)/(k-0.02)
Solving the above, we get k = 10.63% p.a.
Question 20
Sales = $75
Net profit margin = 8%
Hence, net profit = (8/100)*75 = $6
ROE = 16%
Hence, (6/Equity)*100 = 16
Solving the above, Equity = $37.5
Working capital = Current Assets – Current liabilities
Hence, 10 = Current Assets – Current Liabilities
Thus, Current liabilities = Current Assets - 10
In order to determine the current assets, the following accounting equation would be used.
Assets = Liabilities + Equity
Putting the respective values of long term debt and equity, we get current assets =$12.5

Question 21
Based on the information provided, beta of Sony stock is 0.95. The cost of equity for Sony
stock can be computed using the CAPM model as shown below.
Cost of equity for Sony stock = 2% + 0.95*8% = 9.6% p.a.
The current price of Sony stock is $ 46.63
The next year dividend is expected as $ 0.26
Let the implied dividend growth rate be g%
Hence, 46.63 = 0.26/(0.096 –g)
Solving the above, we get g= 9.04%