BE300-4-FY/5

UNIVERSITY OF ESSEX

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SECTION A

Answer ONE question from Section A

QUESTION ONE (COMPULSORY)

a) Assume that a bond will make payments every six months as shown on the following timeline:

i) What is the maturity of the bond (in years)?

(8 marks)

ii) What is the coupon rate (in percent)?

(10 marks)

iii) What is the face value?

(7 marks)

b) Suppose that Starbucks Corporation (SBUX) issued a two-year bond with a face value of $1000 and an annual coupon rate of 6%. The yield to maturity on this bond when it was issued was 5%.

i) What was the price of this bond when it was issued?

(10 marks)

ii) Does this bond trade at a discount, at par, or at a premium?

(5 marks)

iii) Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?

(10 marks)

[TOTAL 50 MARKS]

END OF SECTION A

SECTION B

Answer ONE question from Section B

QUESTION TWO

a) Define the term investment. Provide an example of (i) securities investment, (ii) short-term investment, and (iii) long-term investment.

(10 marks)

b) Assume that you buy 2 shares of Facebook Inc. at $220 per share, putting up a 50% margin.

i) How much equity funds do you need to provide to make this margin transaction? What is the borrowed amount in this transaction?

(6 marks)

ii) If the stock price falls to $200 per share, what is your new margin position?

(6 marks)

iii) What is your rate of return (return on equity) in (ii)? What would your rate of return in (ii) be if the transaction was without margin (100% equity)?

(12 marks)

iv) Explain the main advantages and disadvantages of this margin transaction for you as investor.

(16 marks)

[TOTAL 50 MARKS]

QUESTION THREE

a) Define the terms return and risk. What is the relationship between an investment’s return and risk?

(16 marks)

b) Given the data below, find the average return and standard deviation of return for security A:

(12 marks)

c) Assume that security B has an average return of 16% and a standard deviation of return of 3.3%, and that correlation between security A in (b) and security B is -1. Calculate the average return and standard deviation of return for a portfolio 50% invested in security A and 50% invested in security B. Comment on the result.

(22 marks)

[TOTAL 50 MARKS]

QUESTION FOUR

a) Danny is considering a stock purchase. The stock pays a constant annual dividend of $2.00 per share and is currently trading at $20. Danny’s required rate of return for this stock is 12%. Should he buy this stock?

(15 marks)

b) Procter and Gamble (PG) paid an annual dividend of $1.72 in 2009. Danny expected P&G to increase its dividends by 8% per year for the next five years (through 2014), and thereafter by 3% per year. If the required return on P&G’s stock was 8% per year, use the dividend valuation model to estimate its share price at the end of 2009.

(25 marks)

c) Danny expects that P&G’s competitor, Estée Lauder (EL) will pay a dividend of $2.72 per share at the end of this year and $2.99 per share next year, and its stock price is expected to grow to $53.72 in two years. If the required return for Estée Lauder’s stock is 11.1%, what price would he be willing to pay for a share of Estée Lauder’s stock today, if he planned to hold the stock for two years?

(10 marks)

[TOTAL 50 MARKS]

END OF SECTION B

END OF QUESTION PAPER

Equation Sheet

DEGREE: B.Sc. ACCOUNTING, AUDITING AND FINANCE / BBA

College of Banking and Financial Studies

SEMESTER: Spring 2020

Instructions to candidates:

1. This assessment is Open Book exam which is a substitute of your Final exam. It is to be completed Individually.

2. Kindly include your Name and Student Number in the heading page above.

3. This Assessment accounts for 50% of the total marks available for this Module.

4. Answer all the questions.

5. You are expected to show all your workings clearly wherever needed.

6. Please start each answer on fresh page.

2. Plagiarism is a form of cheating in which students use the work of others and present it as their own. Do not allow another student to copy your work and then submit it under their own name. The college considers this form of cheating as a serious offence.

7. This assessment is mostly based on computations, implications, consequences, viewpoints, critical analysis and case study questions. Please limit your discussions, viewpoints or critical analysis around 1200 words. All your calculations should be shown in full into the main body of your answer.

8. Please be aware that your work will be submitted through Turnitin. You must only submit your own work including correct citations and references for any external materials used in your work.

Class ID: 24155846 Enrolment Key: Sem2

Section A – THREE questions (compulsory) to be attempted 60 marks weightage

(iii) Based on the above calculation, give your overall view on working capital situation of Oman Cement Company between the year 2018 and 2019. What are your suggestions to Oman Cement Company for strengthening Working Capital Management? (5 + 10 + 5 = Total 20 Marks)

a) Calculate expected annual return on equity (ROE) under each option (the current, option I and option II)

The company’s standard payback period is 2.5 years and standard ARR is 12%. The cost of capital is 10%?

Required:

(i) Calculate Accounting Rate of Return for both Methanol and Fertilizer project.

(ii) Calculate Payback Period of Project Methanol and Fertilizer.

(iii) Calculate the NPV of Methanol and Fertilizer project.

(iv) Calculate Profitability Index for both projects.

(v) Calculate IRR of Methanol and Fertilizer project

· NPV is negative RO 1,956 @ 40% for Menthol Project

· NPV is negative RO 5,359 @ 40% for Fertilizer Project

(vi) Present the overall results of above in a table and recommend one best proposal to management. Give recommendation for your recommendation.

(10+6+8+3+9+4 = Total 40 Marks)

Financial Management (UG 038) – OPEN BOOK EXAM – Spring 2020 Page 8