Calculate the covariance between share jay and kay returns

Assignment Help Financial Accounting

Reference no: EM131095317

Part A- Questions

Question 1: Portfolio valuation

Consider shares in two companies, JAY and KAY, as follows:

Expected Return

E(R)

Standard Deviation

Correlation Coefficient

Share JAY

12%

18%

- 0.3

Share KAY

24%

32%

a) Calculate the covariance between Share JAY and KAY returns.

b) What is the expected return and standard deviation of returns on a portfolio comprising 35% in Share JAY and 65% in Share KAY?

c) If you wanted to create a portfolio consisting only of these two shares, how much would you need to invest (weights) in each share so that your portfolio return would be equal to 15.6%? Note: do not round.

d) Using the weights calculated in part c), calculate the variance and standard deviation of your portfolio.

Question 2: Bond valuation

Jasmine Ltd is considering issuing bonds to raise funds for a new project. The following three options are being considered.

Bond	Coupon Rate	Coupon/Compounding Frequency	Yield	Term in years	Face Value
A	0%	half-yearly	7.5%	5	$1,000
B	6.5%	half-yearly	7.5%	10	$1,000
C	8.4%	yearly	7.5%	8	$1,000

a) Calculate the market price of each bond.

b) Classify each bond as either selling at a premium, par or discount.

c) Assume Jasmine has decided to issue only B Bonds. If Jasmine Ltd needs to raise $465,260 how many bonds would need to be issued?

Question 3: Share valuation

Calculate the current market price of each of the following shares assuming a discount rate of 10%.

a) NoChange Ltd is a company with no growth potential. Its last dividend was $4.25, and it expects no change in future dividends.

b) ConstantGrowth Ltd just paid a dividend of $4.25 and it expects its dividend to grow steadily at 4% per year.

c) SteadyGrowth Ltd plans to pay a dividend of $4.25 next year. It expects its dividend to grow steadily at 4% per year.

d) SuperGrowth Ltd just paid a dividend of $4.25 and it expects its dividend to grow quickly at 12% per year for the next three years. It then expects the growth rate to remain constant at 4% per year.

e) QuickGrowth Ltd plans to pay a dividend of $4.25 next year. It expects its dividend to grow quickly at 12% per year for the next three years. It then expects the growth rate to remain constant at 4% per year.

Part B- Assessment Brief

Individual Assessment - case study analysis

Learning outcomes addressed-

-Explain the importance of the time value of money, risk and return and cash flow when making informed business decisions including capital budgeting.

-Understand working capital management

-Evaluate the concept of optimal capital structure

Assessment Brief -

-Students need to write a short report based on a case study which will be uploaded into the moodle in week 4.

-The assignment requires student to discuss/solve problems, apply capital budgeting techniques (NPV, IRR etc.) and perform calculation to support capital budgeting decision making

-Responses need to be given for the specific questions raised in the case study.

-All the calculations need to be shown in the document.

-Make a brief theoretical discussion under themes of each question.

-Finally, results need to be presented in a formal report format. At the same time recommendations must be given by analysing and interpreting the findings that are derived from the calculations.

-Word limit: Maximum length 1500 words (+/ - 10%) - not including the title page, executive summary, table of contents and appendices.

Number of Words - 2250 Words / 9 Pages

Style: Harvard

References: 5.

Reference no: EM131095317

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