Introduction To Finance

SCHOOL OF MANAGMENT

INTRODUCTION TO FINANCE, AFE 4004

Alternative Assessment:

Submission Date: 15th May 2020 – 3:00 PM

TYPE OF ASSESSMENT
(Coursework)

INSTRUCTIONS to CANDIDATES

● This assignment is an extra assessed piece of work as a substitute for the group based coursework and Test 2. It is to be completed individually.
● It accounts for 65% of the total marks available for this module.
● The submission date is 15th May through CANVAS. You will have 2 weeks automatic extension.
● Answer ALL questions.
● You are expected to present all your workings.
● Find the companies assigned to you in Excel file on CANVAS.
● All students need to be aware that the current rules and regulations on plagiarism prescribed by the University apply and you are advised to become fully familiarised with their content before starting your preparation.
● Word limit is 2000.

 

Question 1 (25 Marks)

Brad Co. is evaluating a project with the following cash flows. The firm does not have any debt and all the required financing for the project is through stockholders.

Table 1: Cash flows of the project
Year Cash flow (£)
1 (45,000)
1 14,000
2 16,000
3 17,000
4 20,000

Table 2: Risk and Return
Expected Return Standard Deviation Beta
Brad Co. ? 30% 1.3
FTSE 500 13% 12%
Risk Free Asset 2% 0%

Using the provided information in Table 2 and assuming that CAPM holds:
1- Calculate the expected return of the firm. (5 marks)
2- Using the estimated expected return, evaluate the project using the following criteria (Table 3) and decide if you accept/reject project based on each criterion (the last column of table 3). (10 marks)
Hint: You can use excel to find out IRR of the project.
Hint: Consider the managers’ threshold for PB, DPP and PI.
3- Please provide NPV profile of the project. (5 marks)
Hint: Use excel to draw the graph and then paste in the word file.

Table 3: Project criteria
Criteria Value Managers’ Threshold Accept/Reject
NPV
IRR
Payback Period (PB) 2.5 year
Discounted Payback Period (DPB) 4 year
Profitability Index (PI) 0.5

4- Considering estimated criteria, provide your insight about this project as an independent analyst. ( 5 marks)

Question 2 (15 marks)
You work as a financial analyst in Brad Co. Mr John Merton is a new client who is interested to invest for his future. He wants some help in terms of personal financing. He is risk-taker, 35 year old, and has 25 years to retirement.

a) Explain to him what are the main processes of personal finance planning?
(5 marks)

b) Considering the characteristics of Mr Merton, what are your suggestion as investments options for investment in money market and capital market?
(10 marks)

 

Question 3

company 1 – Mckesson corporation
Symbol- MCK

company 2 – Davita Inc.
Symbol- DVA
(50 marks)
a) Collect the weekly share price data (adjusted close) of companies assigned to you and the price data for the S&P500 market index for the period of one year. Calculate the weekly returns and graph the returns of the share prices and the index over the period (assume no dividends). Interpret the graph. (20 marks)
(Hint: Download data from Yahoo. Finance and do the calculations in Excel file. Then copy & paste in word file.)

b) Are there any market or industry specific factors that you think explain the share price movement of your companies over the period of one year? (10 marks)

c) Calculate the average weekly returns and the standard deviation of the 2 companies and the index over the last year. Which of the companies has higher risk? Which factors specific to that company might explain the fact that the company has higher risk? (20 marks)
(You need to do the procedure in excel and them to the word file)