contributes 25 per cent to the total marks available for continuous assessment on BB831. No specific word limits will be applied to some of the questions in this TMA
business
Description
TMA 01
contributes 25 per cent to
the total marks available for continuous assessment on BB831. No specific word
limits will be applied to some of the questions in this TMA. However, when you
are allocating your word count, you should take account of the marks available
for each question. Please answer all questions.
Question 1 (30 marks)
Part (a)
Assume it is 1 January 2017. A UK
based investor has researched two possible bond investments, but an
intermittent printer fault has caused some important information to be missing
from the printout. The latest coupon on each bond has just been paid. Each bond
has a face, or par, value of £1000. The investor assumes that each bond pays
coupons annually.
|
Bond |
Coupon
rate |
Maturity |
Current
price |
Yield
to maturity |
|
ABC |
6.50% |
31
December 2022 |
? |
5.50% |
|
XYZ |
4.45% |
31
December 2024 |
£838.45 |
? |
·
i.Complete the table by calculating the current price of bond
ABC (4 marks) and yield to maturity of bond XYZ (6 marks).
·
ii.The investor subsequently realises that the printer had not
detailed the fact that the ABC bond makes semi-annual coupon payments.
Recalculate the current price of the ABC bond. (6 marks)
Part (b)
Holefoods plc, a UK based company
wants to invest £1,500,000 for a three-year period. Inflation is currently 1.5%
per annum and is expected to remain at this rate for the foreseeable future.
The choice is between two possible investments. Over recent years, the
frequency distribution of the actual returns achieved by the two investments
has been observed, but there is no information available about the correlation
between the two investments.
Investment R
|
Annual
rate of return |
Probability |
|
8% |
22% |
|
10% |
28% |
|
12% |
24% |
|
14% |
26% |
Investment S
|
Annual
rate of return |
Probability |
|
1% |
40% |
|
9% |
12% |
|
18% |
8% |
|
35% |
40% |
i.Calculate the expected rate of
return and the standard deviation of the expected return for each of the
investments. (6 marks)
ii.Advise Holefoods how to choose
between the two investments. Should Holefoods give any consideration to
splitting their investment between the two investments? Justify your
recommendation. (8 marks)
Question 2 (40 marks)
In this question you are required
to estimate the weighted average cost of capital (WACC) for India based paint manufacturing
company, Asian Paints Ltd (stock ticker on NSE: ASIANPAINT) at its financial
year ended 31 Mar 2019. All data in Indian rupees (INR, ₹).
The following balance sheet
information on ASIANPAINT is available:
|
Balance
Sheet |
Year
ending 31 Mar 2019 (₹ Crores) |
Year
ending 31 Mar 2018 (₹ Crores) |
|
Total
shareholder funds |
9519.7 |
8410.2 |
|
Total
long term borrowings |
19.5 |
28.3 |
|
Total
short term borrowings |
596.5 |
492.4 |
The following profit and loss
information on ASIANPAINT is available:
|
Profit
and Loss |
Year
ending 31 Mar 2019 (₹ Crores) |
Year
ending 31 Mar 2018 (₹ Crores) |
|
Revenue |
19350 |
17262 |
|
Interest |
51 |
35 |
For estimating the WACC, you need
to compute the following:
1. Cost of equity
for ASIANPAINT using both CAPM and the Gordon Dividend Discount Model. (10 marks)
2. Cost of debt
for ASIANPAINT using the balance sheet and P&L information given above. (10
marks)
3. The capital
structure of WACC using the balance sheet and P&L information given above.
(10 marks)
4. Estimating the
WACC using the above information. You may take the tax rate to be 30%. (10
marks)
