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)

Instruction Files

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