BSBFIM601 Manage Finances: Value of Government Bond

Questions:

Here is the list of government zero-coupon bond (invoice) prices with different maturities:

  1. (7 marks) Calculate the current price of a government bond with a face value of $1000 and a coupon rate of 7%. It is an annual coupon bond that matures in 5 years.
  2. (13 marks) Calculate the current bond price issued by Suncor Energy if it has a face value of $1000 and a coupon rate of 7%. It matures in 5 years. Use the following table to find the default risk premium. (Assume the default risk is not a function of maturity)

Hint: A common practice to find a corporate bond price is to use bond ratings issued by rating agencies.

  1. Use the average default risk premium of bonds with a similar rating as a benchmark for the default risk premium of the corporate bond of your interest.
  2. Add the benchmark risk premium to the risk-free rate and use it as the yield to maturity of the corporate bond.

**Please note that the risk-free rate depends on the payment structure of the corporate bond.

Question 2: It is January of 2020. Rapid Corporation is in the process of acquiring Tamed Inc. Tamed Inc. has two divisions: oil and gas and retail grocery. The current number of outstanding shares is 200.

  1. (4 marks) Which companies (Choose from the provided list) should you include in your analysis? Explain!
  2. (8 marks) What do you recommend for the total value of the oil and gas division? What about the retail grocery division? Explain how you collect the required information.
  3. (4 marks) The management of Tamed Inc. has informed Rapid Corporation that the Cost of goods sold for the retail grocery division was abnormally high this year due to the temporary closure of one of the local suppliers. We expect a much lower cost of goods sold for that division in the future. Given this information, what do you recommend for the total value of the oil and gas division? What about the retail grocery division?
  4. (4 marks) Rapid Corporation is offering $71 per share. Given the information in part (b), would you recommend the shareholders of Tamed Inc. to accept the offer or decline it? Explain!

Hint: You need to use multiples in your analysis and valuation of Tamed Inc.!

Statement of Comp. Income (Oil and Gas Division)

Sales

2,000

Cost of goods sold

700

Depreciation

300

EBIT

1,000

Interest paid

200

Taxable income

800

Taxes (40%)

320

Net Income

480

Question 3: We are tasked to analyze Netflix Inc. and Forward Industries Inc.

  1. (10 marks) For each company, take a look at the historical monthly returns from September 2016 to August 2021 and calculate the historical arithmetic average return, historical geometric average return, historical variance, and standard deviation of each stock.
  2. (5 marks) What indicators can you find where the two stocks are in the efficient market hypothesis’s strong, semi-strong or weak? Chart one news event for each company and indicate what the market reaction was to this news. Discuss!
  3. (5 marks) Reading a report conducted on Netflix by a third party, you find the expected monthly average return and standard deviations are 4.3% and 8.8%, respectively. Assuming that the monthly returns are normally distributed, calculate the probabilities of the following events:
    1. The return will be lower than -5%.
    2. The return will be higher than 18%.
    3. What range of return would you expect to see 68% of the time?

**You can download the historical data from Yahoo Finance! If you are planning to use a different source, mention the source in part (a). 

Question 4: The purpose of this question is to put the theoretical knowledge learned from chapter 13 to empirical use. Make sure to include all the relevant information in your answers and provide the references for your work.

We will focus on two public companies, JPMorgan Chase & Co. (JPM) and Apple Inc. (AAPL). The historical information for the price is available online from January 1st, 2019, to January 1st, 2021 (the Market Insider website or other sources such as Yahoo Finance). Download the historical daily share prices for this horizon. Select the S&P500 index as a measure of the market for this horizon and download historical daily prices for this index as well. To be able to calculate the risk-free rate, we need the yield of US treasury bonds with the same duration of 2 years. Note that the yield reported for treasury bonds is an annual rate of return, so you must calculate the daily risk-free rate.

  1. (8 marks) Calculate the arithmetic average daily return on the stocks of the companies for the horizon. Calculate the variance and standard deviation of the return on the stocks of the companies as well. Based on your answers and selecting the standard deviation as the measure of risk, does “higher risk, higher return” hold? Discuss. Also, calculate the correlation coefficient between the returns of two stocks using Excel.
  2. (7 marks) Assume that CAPM holds. Based on the given information, calculate the beta for each of the two stocks. Based on the returns calculated in the previous part, and selecting the beta as the measure of risk, does “higher risk, higher return” hold? Discuss.
  3. (5 marks) Assume that you want to create three portfolios from the two stocks you selected (but not the risk-free rate or the market index). The weights of each stock for each of the three portfolios are given below. For each portfolio, calculate the return and beta. Which portfolio has the higher return? Also, calculate the portfolio standard deviation for each pair of the weights. Keeping the beta as a measure of risk, does “higher risk, higher return” hold? Discuss.
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QUALITY: 100% ORIGINAL PAPER – NO PLAGIARISM – CUSTOM PAPER

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