Finance Assignment: Investment Analysis, Models and Funds

This finance assignment delves into various aspects of investment and financial analysis. It begins by examining the significance of the multistage model in stock valuation, contrasting it with the constant growth model, and includes calculations for stock value and Holding Period Return (HPR). The assignment then explores the implications of the Capital Asset Pricing Model (CAPM) on investment decisions, agency problems and their solutions, and calculations of arithmetic and geometric average rates of return. Further, it differentiates between a jewellery store and a grocery store in terms of asset turnover and profit margins, and calculates net asset value per share for different funds. The assignment also addresses the calculation and interpretation of the information ratio for investment managers, compares the Fama French model with CAPM, and differentiates between open-ended and closed-ended funds, as well as private equity and hedge funds. The document concludes by considering the information ratio as a benefit-cost ratio.

FINANCE /
INVESTMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
(a) Significance of multistage model instead of constant growth in discounting model............3
(b) Calculate value of stock along with HPR..............................................................................4
QUESTION 2...................................................................................................................................4
(a) CAPM imply on its effect change on ANZ's investment......................................................4
(b) Agency problems and approaches to solve it........................................................................4
(c) Calculation of Arithmetic and geometric average rate of return...........................................5
QUESTION 3...................................................................................................................................5
(a) Difference of Jewellery store and grocery store in context of asset turnover and profit
margin.........................................................................................................................................5
(b) Calculation of net asset value or per share of each fund.......................................................5
QUESTION 4...................................................................................................................................6
(4.1 a) Calculation of information ratio of every manger...........................................................6
(4.1 b) Calculation of annualised information ratio with context of frequency..........................6
(4.1 c) Ranking managers as per information ratio.....................................................................6
(4.2) Characteristics of S&P /ASX 200 Index............................................................................7
QUESTION 5...................................................................................................................................7
(a) Difference between Fama French model and Capital asset pricing model...........................7
(b) Difference between Open ended fund and Close ended fund...............................................7
(c) Difference between Private equity fund and Hedge fund......................................................7
(d) Information ratio could be considered as benefit cost ratio..................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Investment has been done by various methods as they are very important for adopting for
process of decision making. The present study has been discussing about importance of
multistage model instead of constant growth model. It had shown various calculation for
calculating price or value of stock. Further it has articulated various statements for process of
decision making about investments.
QUESTION 1
(a) Significance of multistage model instead of constant growth in discounting model
Multistage model is given huge importance because of temporarily high rate of growth
during valuation of companies. All these specific organization tends for life cycles at early phase

because of various opportunities for purpose of reinvestment whose outcome is related to rapid
growth and low dividend or it might be no dividends. When these firms get matured, there will
be different opportunities for investment and very less numerous so its growth rate will be
slowdown (Multistage Dividend discount model, 2018).
(b) Calculate value of stock along with HPR
Given:
Risk free rate 6.50%
Expected return of market portfolio 13.00%
Stock's beta 2.7
Dividends 50.00%
Earnings per share 10
ROE 25.00%
Expected return of stock Rf+B(rm-rf) = 24.05%
Value of stock
(Return on equity * equity per share) /
Required return
(a)P1 10.395010395
P0 96
Calculation of dividend D1 51.9750519751
HPR [(D1+P1)/P0]-1
-0.35
(b) -35.03
QUESTION 2
(a) CAPM imply on its effect change on ANZ's investment
There is relationship between required rate of return on stock and required rate of return
of stock market through its beta. Just for assumption, if ANZ's beta remains constant and if there

is raise in market risk then it will give similar effect in required rate of return on market and it
will also raise the ANZ's required rate of return.
(b) Agency problems and approaches to solve it
Agency problems refers to conflict of interest inherent in any specific relationship among
management of organisation and its stockholders. It is also known as problem of principal agent
or information driven which is asymmetric to conflicts of interests as it is directly inherent static
structure of corporate (Ways to resolve agency problems, 2018). There is presence of different
approaches to solve agency problems such as:
 Employees should be incentivized
 Segregation
 Arbitration
 Mediation
(c) Calculation of Arithmetic and geometric average rate of return
Year (A)
Beginning of
year price (B)
Dividend paid
at year end
(C) Rate (D) Details (E)
Geometric
mean (F)
2010 120 2
(PRICE/
BASE)-1 D*B B+E
2011 129 2 7.50% 9.675 138.675
2012 115 2 -10.85% -12.48 102.52
2013 120 2 4.35% 5.21 125.21
Arithmetic
mean 4.35%
QUESTION 3
(a) Difference of Jewellery store and grocery store in context of asset turnover and profit margin
On the basis of asset turnover, jewellery store will gain less asset turnover as compared to
grocery store due to reason that grocery store is replicated as fast moving entity but jewellery

store is occasional moving. On its contrary, the margin of profit is higher in jewellery store as
compared to grocery store.
(b) Calculation of net asset value or per share of each fund
Given
Issues 60000 8 per share
Liability 8000
Number of shares 60000 / 8 7500
Stock Shares Price
Shares *
price Liability
Number of
shares
Net asset
value per
share
Pacific
holdings 1200 12 14400 8000 7500 0.85
James Inc 1300 16 20800 8000 7500 1.71
Harvey
Corp. 1500 25 37500 8000 7500 3.93
Gabbie
Holdings 1000 10 10000 8000 7500 0.26
QUESTION 4
(4.1 a) Calculation of information ratio of every manger
Manager rf rp
Information
ratio
Amanda 0.15 0.95 0.8 0.15
Bryan 0.08 0.42 0.34 0.30
Cassie 0.705 0.075 -0.63 -0.27
(4.1 b) Calculation of annualised information ratio with context of frequency
Manager rf rp Annualized

information
ratio
Amanda 0.15 0.95 0.8 1.06
Bryan 0.08 0.42 0.34 0.30
Cassie 0.705 0.075 -0.63 -8.08
(4.1 c) Ranking managers as per information ratio
Manager Ranking
Amanda 1
Bryan 2
Cassie 3
Interpretation: Usually it determines amount that how much has been exceeded from
benchmark. The desired level of consistency has been gained by higher information ratio and
vice versa. Amanda high information ratio followed by Bryan and then Cassie (Information
ratio, 2018).
(4.2) Characteristics of S&P /ASX 200 Index
 The main objective for float adjusted market cap is indicated for having index as
benchmark which could be traded.
 Low free float stock which are difficult for trade are not considered as benchmark.
 Includes only traded stocks.
 Ensures liquidity.
 Representative, tradable and liquid.
QUESTION 5
(a) Difference between Fama French model and Capital asset pricing model
Fama French had innovated new multi factor asset pricing model such as three factor
model and CAPM determines beta as sole risk factor on basis of returns from expected stock.
Fama french model has expanded CAPM through aggregating risk size along with factors of
value risk to factor of market risk in capital asset pricing model. The excess return could be

easily predicted over risk free rate in Fama french as compared to CAPM. Fama French is time
consuming method.
(b) Difference between Open ended fund and Close ended fund
In the context of capitalisation, open ended fund has unlimited while close ended has
constant capitalisation. There are no restrictions for entry and exit but close ended fund has. In
open ended funds, sale of specific units is directly done with fund but in close ended, both
buying and selling has been traded on stock exchange. In close ended fund, redemption date has
been predetermined but in open ended it is not predetermined. Liquidity is higher in open ended
funds as compared to other. Open ended funds gives presence of diversification but in close
ended units with context of open funds are not present on market line stocks.
(c) Difference between Private equity fund and Hedge fund
The special focus has been provided to medium or short term liquid securities as it should
be easily converted into cash as there is absence of direct control on asset or business of there
investing in hedge funds. But in context or private equity, groups are tends towards long hold,
strategies of investment in multiple year through assets which are illiquid. There is absence or
less control on assets and power of voting in hedge funds whether private equity has huge control
and influenced on managing assets and operation for influencing return of long term.
(d) Information ratio could be considered as benefit cost ratio
For analyzing performance of portfolio it is termed as very important measure.
As its numerator can be indicated as investment on expected return and risk amount
which will be denominated as its denominator. It is fully based on ability of investor for
analysing available information in context of market and in public domain for taking decision
about investing. As its benefit will be gained as benefit by investor because of capability of
decision making to investor.
CONCLUSION
From the above study it can be concluded that, Finance and investment has played major
contribution for evaluating its capacity of shares and performance. It has been articulated that
Capital asset pricing model is more consistent method as compared to Fama-french three factor

model because of time factor as well. It has shown major difference in open and close ended
which in which liquidity has been gained by open ended category.