Financial Management Assignment Solution BHM206/BBS206 S2 2018

This document presents a comprehensive solution to a Financial Management assignment (BHM206/BBS206) from Semester 2, 2018. The assignment covers a range of financial concepts and calculations. The solution includes calculations for the time value of money, portfolio expected return and standard deviation, expected return for preference shares, and the application of the CAPM model. The solution also addresses bond valuation, including effective annual rates, present value of annuities and perpetuities, and the impact of interest rate changes on bond prices. Furthermore, the assignment covers the Gordon Dividend Model, allowing students to determine the current share price and the share price after a specific period. The document provides detailed step-by-step solutions for each question, making it a valuable resource for students studying financial management.

FINANCIAL MANAGEMENT
STUDENT NAME/ID
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Question 1
P=$ 5000
R=2% p . a .
N=5 years=20 quarters
A=P¿
Question 2
(a) Calculation of expected return for portfolio
¿( 0.18∗0.49)+(0.42∗0.37)+(0.23∗0.22)+(0.17∗(−0.12))=0.2738
Hence, expected return for portfolio would be 27.38%.
(b) Calculation of standard deviation for portfolio
Variance ¿ 0.089314
Standard deviation¿ √(0.089314 )=0.2988
Question 3
(a) Expected return for preference shares
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¿ ( ¿ dividend
Price )∗100
The expected return for preference share of Rio Tinto ¿ ( 3.60
43.50 )∗100=8.28 % p . a .
(b) Expected return for the investment = 9.5%
Price of investment that would be paid = x
Now,
( 3.6
x )∗100=9.5
x=$ 37.89
Question 4
CAPM Model
Let the expected market return is x.
13.10=5.7+¿
x=14.21 % p . a .
Question 5
CAPM Model
12.2=3.5+(beta∗7.1)
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beta=1.23
Thus, beta of the share would be 1.23.
Question 6
Comparison would be made based on the effective annual rate.
 Effective annual rate (compounded monthly)
 Effective annual rate (compounded semi-annually)
Loan which shows minimum effective annual rate would be preferable option and thus, loan
should be taken for the rate which is compounded monthly.
Question 7
(a) Present value of annuity would be the amount that would be paid for the total period of
annuity which is computed as shown below.
P = $ 2,000
r = 7% p.a.
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n = 5 years
(b) It is apparent that annuity payments will be continued and hence, it is perpetuity.
Amount needs ¿ be paid= ( yearly cash inflows
rate of return )=( 25000
0.06 )=$ 416,666.7
Question 8
(a) Bond value would be same as face value at the maturity and hence, it would be $700,000.
Current price of bond is x.
(b) Lent maturity period would be 30 days as the bill would be held only for 80 days.
30 days of billing would yield at a rate = 2.30% p.a.
Question 9
(a) Effective annual rate (given) = 6.2%
Let the nominal rate is x% semi-annually.
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In regards to find the current price of the bond, the above shown nominal rate would be used as a
discount rate for future cash flow.
Face value of the bond = $1000
Coupon = 7% of Face value of the bond = $70 payable (Semi-annually)
It represent that coupon would be $35 after each six month.
Maturity period = 20 years = 40 semi-annually
 Current price of the bond
Current price of the bond is more than the face value and hence, it can be said that bond is
trading at premium price.
(b) Rate of interest (Quoted) = 6.2% p.a.
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The above rate would be termed as nominal rate which indicates that for a period od six months
the interest rate would be 3.1%.
The revision in the price of bond is computed below.
The new price of bond is reduced which is expected because the discount rate has been
increased.
Question 10
Average real return (ANX) = (Avg. nominal return) – (Avg. Inflation) = 3.1 – 1.1 =2%
Question 11
Applicable formula
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Question 12
Gordon Dividend Model
Dividend (Next year) = $ 8,
Required Return = 11% p.a.
Dividend growth = 5% p.a.
Current share price (P0) ¿ 8
0.11−0.05 =$ 133.33
Now, share of price after 5 years period is P5
P 0= P 5
( 1+required return ) 5
133.33= P 5
¿ ¿
P5 = $ 224.67
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Question 13
Relevant data and information
Perpetual dividend growth =3.5% p.a. (from 6 years onward)
Required return = 12% p.a.
Gordon Dividend Approach
Therefore, the stock price of ABC share would be $49.48.
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