Corporate finance 2 assignment
Task 1: Risk & Return (50 Marks)
- Prepare a portfolio of a minimum 5 securities from any one Market (India -BSE, US - NYSE, etc.). Discuss the objective of your chosen portfolio.
- Assuming you own certain number of each share or you wish to invest certain amount in each share in your portfolio, calculate the weights of the shares your portfolio.
- Define at least three states of nature and identify the probabilities for the three states of nature. For calculating the probabilities, you have to have use at-least 20 year economic data.
- For each state of nature (years in which the state of nature prevailed in your market) calculate the average expected return for each stock. Summarise and present the information in a table.
- Calculate the Expected Return and Standard deviation of the portfolio. Discuss the implications.
- Calculate beta of each stock using sock return and market return.
- Calculate the beta of the portfolio and discuss its implications in relation to Standard Deviation of the portfolio
- Identify the risk-free rate of return & market return (average) that is appropriate for your portfolio.
- Using the Beta of each share compute Expected return of each of the five shares using CAPM. Compare your answer with the Expected Return of share that you have calculated earlier using the probability and discuss the implications.
- Using the Beta of portfolio compute Expected return using CAPM. Compare your answer with the Expected Return of Portfolio that you have calculated earlier and discuss the implications.
- State all the assumptions that you have made in the above calculations.
Task 2: WACC (50 Marks)
- Pick any one share from your portfolio. Assume that this is your firm. Determine and explain your approach of calculating the weight of debt and weight of equity.
- Determine the average cost of equity from the market information using the CAPM.
- Determine the average cost of equity from the market information using the CDGM.
- Determine the average cost of equity by taking the average of CAPM and CDGM cost of equity.
- Determine the cost of debt from the market information.
- Determine the weight of debt and equity and Corporate Tax rate prevailing your market.
- Calculate the WACC for your firm.
- Assuming classical tax system
- Assuming imputation tax system
- Using Subjective Approach create and discuss table of WACC that you would use to evaluate the projects of various risk level.
- For WACC (classical tax)
- For WACC (imputation tax)
- If this project has lower risk than your current operations evaluate the project (CFs are provided in the table below) using any three decision tools. Discuss your results.
- If this project has same risk level as your organisation, evaluate the project (CFs are provided in the table below) using any three decision tools and discuss your result. K. State all the assumptions that you have made in the above calculations.
Year |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
FCF ($Mn) |
-876 |
-30 |
230 |
342 |
238 |
167 |
165 |
142 |
329 |
225 |
188 |
Task 3:Working Capital Management Simulation (20 Marks)
- You must participate in the working Capital Management Simulation as per the schedule provided in course outlines. Play the game and during the play capture the screenshots of the game and copy the game data into clipboard (Excel).
- In your own words, provide a brief description of the simulation.
- Present your simulation outcomes (snapshots with your identity).
- Discuss the strategy that you adopted during the simulation.
- Present a summary of what you have learned from the simulation.
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