Reference no: EM132512885

ACST6003 - Principles of Finance Assignment - Macquarie University, Australia

Data Description - Excel file acst6003- assignment.xlsx contains the following data:

Annual yields on 30 day bank accepted bills (prices worksheet).

All Ordinaries Share price index (prices worksheet).

Share prices of Insurance Australia Group Limited (IAG) and Macquarie Group Limited (MQG) (prices worksheet).

Dividends for IAG (dividends worksheet).

Dividends for MQG (dividend s worksheet).

Questions -

Q1. Calculate monthly returns for the All Ordinaries (R_m) IAG (R_IAG) and MQG (R_MQG) using the following formula R_t = 100 x ((p_t/p_t-1) - 1). Compute a monthly 30 day bank accepted bill rate as follows R_rf = R_annual/12.

Q2. Compute E(R), σ and CV for all four return/yield series over the 1/09/2000 - 1/02/2020 time period. Comment on all computed quantities in regard s to the risk return trade-off.

Q3. Compute excess returns for the market, i.e. market risk premium as R^e_m = R_m - R_rf, where R_m is the return on the All Ords computed in question 1, and R_rf represents the monthly return on the 30 day bank accepted bill rate. Also compute excess return for each IAG and MQG as follows R^e_IAG = R_IAG - R_rf and R^e_MQG = R_MQG - R_rf. Use the 1/09/2000 - 1/02/2020 time period.

Q4. Obtain CAPM betas for both IAG and MQG using excess returns by estimating the following regressions

R^e_IAG = α_IAG + β_IAGR^e_m + u_IAG

R^e_MQG = α_MQG + β_MQGR^e_m + u_MQG

where u_IAG and u_MQG are the random error terms.

Q5. Present and comment on the two beta coefficients estimated in question 4. What do they imply about the amounts of systematic risk?

Q6. Compute the expected returns for IAG and MQG using the CAPM, i.e.

E(R_IAG) = R_rf + β_IAG(E(R_m) - R_rf)

E(R_MQG) = R_rf + β_MQG(E(R_m) - R_rf)

where R_rf is the average of the monthly risk free rate computed in question 2. E(R_m) is the average of the market return computed in question 2.

Comment and compare the two computed monthly expected returns.

Q7. Annualise the monthly expected returns computed in question 6 by calculating the effective annual rate (EAR). Comment on your results.

Q8. Calculate annual growth rates for dividends for AIG (g_AIG) and for MQG (g_MQG) using the formula g_t = (D_t/D_t-1) - 1.

Q9. Compute the average annual dividend growth rate for IAG and MQG, g^{^}_IAG and g^{^}_MQG using the following formula g^{^} = 1/n ∑g_t. Comment on the two average dividend growth rates.

Q10. Assuming the zero dividend growth model what should be the share price? Use the last annual dividend available (2019) and the R = EAR computed in question 7. Given the last share prices for IAG and MQG (1/02/2020) how well does the zero growth dividend model explain current share prices? Which company is underpriced and which company overpriced according to the zero growth dividend model (calculate percent difference between the model and actual price.

Q11. Assuming constant dividend growth model what should the share price s be?

Use the last annual dividend available (2019) for D, R = EAR from question 7, and g = g^{^}/5 from question 9 in the computation. Given the last share prices for IAG and MQG (1/02/2020) how well does the constant growth dividend model explain current price?

Which company is underpriced and which company overpriced according to the constant dividend growth model (calculate percent difference between the model and actual price.

Q12. Why was it in appropriate to use historical dividend growth rates (computed in question 9) as the input in the constant dividend growth model (question 12), i.e. why did we assume that the growth rates will be 1/5 of their historical average?

Attachment:- Principles of Finance Assignment & Data Files.rar