Finance -FIN303 Financial Management Assignment 1

FIN303
Financial Management
Assignment 1 - Individual Assignment / TMA01
July 2015 Presentation

FIN303

Assignment 1

Individual Assignment
This assignment is worth 25% of the final mark for FIN303 Financial Management.
The cut-off date for this assignment is 28 September 2015, 2359hrs.
In this assignment, you are expected to:
Compute and interpret financial ratios
Evaluate investment proposals
Apply knowledge to decide appropriate financing plan and dividend policy
___________________________________________________________________________

In June 2015, you joined a private banking firm as a relationship manager. As your first
assignment, your boss asked you to join her for a client meeting with Mr. Chou. During your
discussion with client, you understand that Mr. Chou retired at the age of 65 years this year
and has recently sold his software business for $2 million. He intends to retire and hopes to
invest the proceeds in income generating financial assets.
Since he will be retiring, he would need an investment that pays periodic payments. He is
considering investment in stocks, bonds or annuity. You have identified the following
possible investments: Equity stock of Commodity Investment Company which invests in
commodities.
At your request, your firm’s equity research department furnished you with their 5-year
dividend forecast for this counter:

Year
2019
2018
2017
2016
2015

Dividend Per
Share
(Cents)
13
12
11
11
10

The dividends are anticipated to grow at 3% per annum from 2020 onwards. They also told
you that the market risk premium is 4% and the risk-free rate is 2%. The beta and standard
deviation of this company are 1.1 and 30% respectively. The shares are trading at $3.25 on
June 30, 2015. The dividends will be paid on 31 December every year.
Your suggestion for him to consider bonds issued by OSIM international and the salient
terms are detailed as follows:






Issue date = July 1, 2011
Amount issued = $850 million
Maturity date = June 30, 2021
Coupon = 8%
Payment = Semi-annual

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Assignment 1

Par value = $100.00

OSIM received an Aa2 credit rating by Moody’s and the credit spread for corporate bonds
with similar rating is 4%. The standard deviation of this bond is 12% and the correlation
coefficient between stock and bonds is -0.3.
The third option is to purchase a life annuity offered by insurance company. This annuity
scheme will make a payout of $2,500 at the end of each month for as long as policyholder
lives. Mr. Chua expects his life expectancy to be that of an average Singaporean, which is 85
years.
You will be having a follow up meeting with Mr. Chou next week and your boss needs you to
address the issues raised at the last meeting as well as evaluate the risk and return of a
portfolio comprising stock and bond in the following combinations:
stock
100%
80%
60%
40%
20%
0%

bond
0%
20%
40%
60%
80%
100%

Question 1
Calculate the cost of equity by applying the Capital Asset Pricing Model (CAPM).
(10 marks)

Question 2
Calculate the net present value of dividends paid by the company and advise Mr.Chou
whether he should consider investing in this stock. Note that the price is being calculated as
of June 30 while dividends are paid on December 31 every year.
(20 marks)

Question 3
Apply principle of time value of money to calculate the fair market value of the bond.
(15 marks)

Question 4
Calculate the value of the life annuity offered by the insurance company. Assume the interest
rate for annuities to be 3%.
(15 marks)

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Question 5
Calculate the expected return and standard deviation of the two-asset portfolio and plot a
graph to illustrate the data points. Assume the expected return on stock and bond are 10% and
6% respectively.
Recommend a portfolio mix to Mr.Chou on the presumption that he is a risk adverse investor.
(40 marks)

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