Portfolio Management, Financial Management

Assignment Help:
Portfolio Project
The purpose of this project is to help you to gain an understanding of how the stock market works and of the relationship between theory and practice.

You are given a notional £200,000 to invest and manage. You are required to follow an active trading policy at least in the first term. In the second term you can follow a buy and hold policy. Shares must be bought in multiples of 100 if the price is less than £2 and in multiples of 50 if the price is greater than £2. Debentures and Government stocks, which have a nominal value of £100 each, may be bought without restriction.

Commission is payable on all purchases and sales, at the following rates:

Ordinary Shares 1.0% of value (minimum: £10)
Government Securities 0.7% of value (minimum: £12.50)

You may invest in overseas securities, though all transactions must be in £ Sterling.

Transfer stamp duty is payable on all share purchases: the rate is £0.50 for every £100 or fractional part of £100.

There are no overdraft facilities nor additional sources of finance. Your cash balance must not become negative.

You are required to liquidate your holdings by Friday 22 March, 2013, and to submit your portfolio project, together with your transactions table, by Friday 29 March, 2013. When writing up the project, there is no need to describe every single transactions you have entered into (though every transaction should be listed in your transaction sheet). You should:

(i) Outline the portfolio theory that you have applied in your project.

(ii) Carefully explain your investment policy, giving examples of how you implemented it and explaining how and why it changed over the life of the project (if it did);

(iii)Explain carefully what brought about the changes (for example, knowledge you gained on the course or from practical experience);

(iv) Comment on your findings.

(v) Comment on the divergence between the theory you have learnt on the course and the practical problems of implementation;
(vi) Comment on the performance of the stock market in general and on what you think has influenced it over the life of the project;

(vii)Provide an assessment of how well your strategy has worked in terms of risk and return. This will require a brief comparison with other strategies, one such being a buy-and-hold policy.

(viii)Any limitations that you encountered.




Post plc and Reply plc are two companies that are in the same business risk class.

Post plc is financed by 60 million ordinary shares with a market value of 350p each and by £200 million 10% irredeemable debentures with a current market value of £125 each. Post plc has operating earnings before interest and tax of £85 million per annum.


Reply plc is financed by 10 million ordinary shares with a market value of 700p each and by £60 million 5% irredeemable debentures with a market value of £70.00 each. Reply plc has operating earnings before interest and tax of £20 million per annum.

Both companies have the same dividend policy in that they both do not retain any earnings, choosing instead to distribute all the earnings to their shareholders.

Mr Roberts is a shareholder in Post plc, with a holding of 2,000 ordinary shares. Mr Roberts is thinking of selling his shares in Post plc and buying shares in Reply plc as he believes he may be able to make a capital gain by doing so. Assume that Mr Roberts is able to borrow or lend at a rate of 10%.

The rate of corporation tax is given as 30%.
Required
(a)
(i) Calculate the after tax cost of equity, the after tax cost of debt, and the overall weighted average cost of capital for both Post plc and Reply plc. Explain what each of these represents.
[30 marks]
(ii) Mr Roberts has asked for your advice as he wishes to switch his investment from Post plc to Reply plc but still retain his investment profile. Carefully explain showing all calculations what actions Mr Roberts would have to take in order to achieve this position. Fully explain your answer. Would you advise Mr Roberts to go ahead with such a switch.
[55 marks]
(iii) Calculate Mr Roberts income position in Post plc and Reply plc both before and after the switch.
[15 marks]



Related Discussions:- Portfolio Management

Plan for financial management, 1. Review and analyse financial data for the...

1. Review and analyse financial data for the last year to establish areas which have generated a profit or loss in your organisation. 2. Conduct a research to review reasons for

Leverage, Evaluate the importance of leverage in financial management of a ...

Evaluate the importance of leverage in financial management of a small scale company

Cost of capital, Q. Cost of capital? The terms of cost of capital refer...

Q. Cost of capital? The terms of cost of capital refers to the minimum rate of the return a firm must earn on its investment so that the market value of the company equity shar

Difference between transaction and translation risk, Question: You have...

Question: You have been appointed as the head of the treasury of Platza International, an automobile firm with many subsidiaries abroad. The management of Platza International

Determine the change in profit, (a) The BEQ is 200 customers per month, i.e...

(a) The BEQ is 200 customers per month, i.e. $3,000 / ($20 - $5) (b) The margin of safety is 300 customers, i.e. 500 - 200 (c) Graph (d) New break-even is 334 customers, i

Global bonds, A debt obligation that is issued and traded both in the...

A debt obligation that is issued and traded both in the US bond market and the Eurobond market is referred to as global bond. For an entity to issue global bonds,

Specifications for contracts, S pecifications Following are the variou...

S pecifications Following are the various specifications that we need to apply while creating contracts. If the goods to be procured are covered under Bureau of Indian

Expansion financing, The securing of the working capital needed for the sup...

The securing of the working capital needed for the support of raises in accounts receivable and inventory related with an organizations initial expansion time.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd