Finance Assignment : Financial Management

Assignment File 1

Assignment 1 Due date: 30 November 13

Weighting: 25% of the total marks for this course

Important note

You must use word processing software (such as Microsoft Word) to prepare the TMAs, and submit the TMAs via the Online Learning Environment (OLE). All assignments must be uploaded to the OLE by the due date.

Failure to upload a TMA in the required format to the OLE may result in the score of the TMA being adjusted to zero.

This assignment consists of five questions, carrying a total of 100 marks. Please show your calculation steps clearly.

Question 1 (18 marks)

On 2 October 2013, Bloomberg (http://www.bloomberg.com) reported that ANA Holdings Inc. won more take-off and landing rights than Japan Airlines Co. at Tokyo’s Haneda airport in a distribution of new international slots by the government, a person familiar with the decision said.

a After reading the above news you revise your investment in the Japan stock market. Assuming that you gain in the stock market via your revised investment in Japan, which type of Efficient Market Hypothesis exists? Please elaborate on your answer. (9 marks)

b Your friend Dee revises her investment in Japan one week after the above news is released and gains a profit as well. Does she experience the same type of Efficient Market Hypothesis as yours? If not, which type of Efficient Market Hypothesis exists in her case? Please elaborate the answer. (9 marks)

Question 2 (10 marks)

The information below is from question 6 on page 154 of the textbook.

a Assume that the total cost of a college education will be $290,000 when your child enters college in 18 years. You presently have $55,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s college education? (6 marks)

b If the cost of a college education increases during these years, the total cost will be up to $350,000 when your child enters college in 18 years. Applying the annual rate of interest in part (a), how much money should you have presently available for investment? (4 marks)

2 FIN B280 Introduction to Financial Management

Question 3 (18 marks)

The information below is from the question 71 on page 215 of the textbook.

Your financial planner offers you two different investment plans. Plan X is a $20,000 annual perpetuity. Plan Y is a 20-year, $28,000 annual annuity. Both plans will make their first payment one year from today.

a At what discount rate would you be indifferent between these two plans? (8 marks)

b Ignoring the discount rate, your financial planner tells you that some investors choose Plan X and some others choose Plan Y. The reason is that investors prefer to look for an investment plan that fits their needs, such as for a mortgage, retirement, etc. Try to think about your needs, then pick one investment plan (Plan X or Plan Y) for yourself and explain your decision. (10 marks)

Question 4 (28 marks)

Derek invests in First Property Holding Company for years with a rate of return of 12%. The company announced the dividend policy for next year — 25% per share and the dividends are expected to grow at 7% annually afterwards.

a The company decides to expand its business in resorts and hotels. It is estimated that the expected growth rate will be increased by 2% while stockholders will raise their required rate of return to 15%. Would you suggest that Derek hold his shares of First Property Holding Company? Please elaborate and provide any numerical answer to support your decision. (8 marks)

b VD Group Company is another main investment for Derek. This year, the VD Group stock’s beta is 2.5 with an expected return of 30%. Presuming that Rf is 6% and E(RM) is 15%, should Derek hold the share of VD Group? Please elaborate and provide any numerical answer to support your decision. (8 marks)

c Obviously, we have adopted two different stock valuation methods in parts (a) and (b), respectively. Please list, describe and compare these two methods. (12 marks)

Question 5 (26 marks)

Central Moneymarkets Unit from the Hong Kong Monetary Authority shows the Bond Price Bulletin. The Bulletin, available at the following link, shows a series of bond prices in Hong Kong:

https://www.cmu.org.hk/cmupbb_ws/eng/page/wmp0100/wmp010001.aspx

Assignment File 3

a Assuming that you are looking for the bonds with at least a 2.00% coupon rate for 5 years’ investment, please choose two bonds from the list and mark down all the details, such as the price provider, CCY, issuer, coupon (%), maturity, bid price and the last updated date for part (b) and (c). (6 marks)

b Based on the information in part (a), and presuming that today’s date is 1 January 2014 and the information is still valid, evaluate the rate of return of these two bonds, respectively, if you hold the bonds until 31 December 2019. (12 marks)

c Please list one bond with zero coupon from the list and analyse why investors interest in zero coupon bond investments. (8 marks)