Corporate Finance

BAO2001
Assignment Semester 2 2018

Introduction
The focus of this assignment is on Risk and Return. The expectation is that
students will develop technical skills in measuring returns, risk
assessment and especially analysis. Students are required to use the
data provided in the case problem and exhibits to make various
calculations with the view of producing a 700 word report.

Assignment Components
The exhibit contains monthly returns for Financial Ltd, Construction Ltd and the
Stock Market index.

Assignment Weighting
This assignment accounts for 10% of the subject’s assessment.

Guidelines for the Assignment

 Excel functions should be used to complete all statistical calculations.

 The standard of your presentation will be assessed and marked. The

report needs to address all the issues addressed in the task and report
section. The analysis component needs to show a comprehensive
understanding of all the statistical results. Simply describing your
results is not enough.

 Evidence of your team’s breadth and depth of research will be

assessed.

 You need to reference. Marks will be deducted from assignments that

fail to reference. (Use Harvard Referencing)

 There is an expectation that each team of three will work collectively

and in corroboration rather than independently when completing this
assignment. As members of a team you are all jointly responsible for the
contents of your assignment.
 Due date: Refer to the unit Guide for submission date.
Also note that students have to complete this assignment in teams three.
Assignments submitted by individuals will NOT be accepted. This assignment
requires each group to undertake independent research. No further assistance will
be provided to student groups in completing the assignment.

Table 1: Monthly Values for the Market Index and Two Traded Shares.

Month Market Financial Construction

index Ltd ($) Ltd ($)
1 4650 13.05 8.00
2 4770 13.40 7.60
3 4840 13.87 7.00
4 4940 13.12 7.70
5 4815 13.37 8.10
6 4788 13.00 8.60
7 5055 13.50 8.30
8 5125 13.90 8.90
9 5035 14.12 9.70
10 5115 14.87 10.20
11 5200 15.25 10.65
12 5255 16.05 11.05
13 5305 16.40 11.45
14 5408 16.00 10.95
15 5510 16.25 10.55
16 5430 16.50 11.00
17 5360 17.00 10.55
18 5420 17.35 10.10
19 5490 18.00 10.70
20 5555 18.35 9.45
21 5500 18.55 10.12
22 5575 19.20 10.45
23 5645 18.70 10.05
24 5695 18.20 10.85
25 5770 18.75 11.15

Table 2: Previous 5-year Dividend History for the two Listed Companies

Financial Ltd Construction Ltd

1.00 0.60
1.03 0.62
1.07 0.66
1.11 0.70
1.15 0.74
Tasks
Each team is required to make the following calculations using the
statistical functions on Excel:

1. Convert the price data into returns on a month to month basis. You should
have 24 returns for the market and the two shares after you complete this
process.
2. Mean (expected) return and standard deviation for the stock market and
the two companies.
3. The coefficient of variation for the market and the two companies. Explain
your findings in the context of risk and return.
4. The correlation coefficient between Financial and Construction Ltd. Please
interpret your results from the viewpoint of risk reduction.
5. The standard deviation of returns for a portfolio consisting of Financial Ltd
and Construction Ltd (assume equal weightings). What do your findings
suggest about the level of risk reduction? Please use a quantitate
approach to illustrate your response.
6. Beta coefficient calculation for both Financial and Construction Ltd. Please
note that a beta can be both negative and positive. Please consider the
implication of a negative beta on the CAPM and asset pricing (valuation).
7. Assuming a risk-free rate of 3% and utilizing the information in both tables
use the dividend valuation model to determine the present value of the two
shares. Comment on the valuation and any perceived problems or
limitations in the valuation.

REPORT
Your team is also required to produce an approximately 700 word report that
comments of the results calculated above. The report will need to refer to each
statistic calculated and interpret the result and make comparisons amongst the
market index and the two companies. Your team is required to specifically
address what each statistic is actually measuring and its implications from a risk
and return viewpoint. You will also need to focus on the impact of creating a
portfolio of two shares and the implications for risk reduction (You will need to
provide some quantitative evidence of risk reduction). Furthermore, the Beta of
each company needs to assessed and interpreted in the context of asset pricing.
Finally, calculate the present value of each share by determining the required
rate of return (CAPM) and then utilizing the dividend growth model.