business finance - 2nd graded assignment

COURSE CODE: BCO 212 COURSE NAME: Business Finance 1 Task brief & rubrics

Task: EXERCISE 2

Details of the task:

 individual

 answer the questions below

 Submission: one .pdf file

Formalities:

 Wordcount: no more than 800 words.

 Cover, Table of Contents, References and Appendix are excluded of the total wordcount.

 Font: Arial 12,5 pts.

 Text alignment: Justified.

 The in-text References and the Bibliography have to be in Harvard’s citation style.

Submission: TBA

Weight: This task is a 33.3% of your total grade for this subject.

It assesses the following learning outcomes:

 To be able to apply the concept of time value of money

 Apply financial models of annuities and perpetuities

Exercise 1 (20 points):

Suppose the risk-free return is 4% and the market portfolio has an expected return of 10% and a volatility of 16%. Merck & Co. (Ticker: MRK) stock has a 20% volatility and a correlation with the market of 0.06.

a. What is Merck’s beta with respect to the market?

b. Under the CAPM assumptions, what is its expected return?

Exercise 2 (40 points):

You are considering how to invest part of your retirement savings. You have decided to put $200,000 into three stocks: 50% of the money in

GoldFinger (currently $25/share), 25% of the money in Moosehead (currently $80/share), and the remainder in Venture Associates (currently

$2/share). If GoldFinger stock goes up to $30/share, Moosehead stock drops to $60/share, and Venture Associates stock rises t o $3 per share,

a. What is the new value of the portfolio?

b. What return did the portfolio earn?

c. If you don’t buy or sell shares after the price change, what are your new portfolio weights?

Exercise 3 (40 points):

You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns:

a. What was XYZ’s average historical return?

b. Compute the market’s and XYZ’s excess returns for each year. Estimate XYZ’s beta.

c. Estimate XYZ’s historical alpha.

d. Suppose the current risk-free rate is 3%, and you expect the market’s return to be 8%. Use the CAPM to estimate an expected return for

XYZ Corp.’s stock.

e. Would you base your estimate of XYZ’s equity cost of capital on your answer in part (a) or in part (d)? How does your answer to part (c)

affect your estimate? Explain.

Rubrics

Exceptional 90-100 Good 80-89 Fair 70-79 Marginal fail 60-69

Knowledge & Understanding

(20%)

Student demonstrates excellent understanding of key concepts and uses vocabulary in an entirely appropriate manner.

Student demonstrates good understanding of the task and mentions some relevant concepts and demonstrates use of the relevant vocabulary.

Student understands the task and provides minimum theory and/or some use of vocabulary.

Student understands the task and attempts to answer the question but does not mention key concepts or uses minimum amount of relevant vocabulary.

Application (30%) Student applies fully relevant knowledge from the topics delivered in class.

Student applies mostly relevant knowledge from the topics delivered in class.

Student applies some relevant knowledge from the topics delivered in class. Misunderstanding may be evident.

Student applies little relevant knowledge from the topics delivered in class. Misunderstands are evident.

Critical Thinking (30%)

Student critically assesses in excellent ways, drawing outstanding conclusions from relevant authors.

Student critically assesses in good ways, drawing conclusions from relevant authors and references.

Student provides some insights but stays on the surface of the topic. References may not be relevant.

Student makes little or none critical thinking insights, does not quote appropriate authors, and does not provide valid sources.

Communication (20%)

Student communicates their ideas extremely clearly and concisely, respecting word count, grammar and spellcheck

Student communicates their ideas clearly and concisely, respecting word count, grammar and spellcheck

Student communicates their ideas with some clarity and concision. It may be slightly over or under the wordcount limit. Some misspelling errors may be evident.

Student communicates their ideas in a somewhat unclear and unconcise way. Does not reach or does exceed wordcount excessively and misspelling errors are evident.