FIN2601 Assignment 2 (ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEED

Well-structured FIN2601 Assignment 2 (ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEED. (DETAILED ANSWERS - DISTINCTION GUARANTEED!)... Question 1 Complete Mark 1.00 out of 1.00 QUIZ The financial manager of Summer Financial Group is tasked with evaluating the standard deviation of a proposed investment project. This analysis aims to provide insights into the potential risk associated with the project's expected returns, which are linked to the future performance of the economy over a specific period as follows: Economic scenario Probability of occurrence Rate of return Recession 0,1 20% Normal 0,6 13% Boom 0,3 17% What is the standard deviation of the proposed investment project? 1. 7,07% 2. 10,45% 3. 15,81% 4. 18,67% − Question 2 Complete Mark 1.00 out of 1.00 Your grandmother's portfolio is structured with 40% of her funds allocated to Transatlantic Transaction and the remaining 60% invested in Treasury Bills. This allocation strategy reflects a balance between potential returns and risk mitigation, aligning with her investment objectives and risk tolerance. The investment broker overseeing your grandmother's portfolio has furnished pertinent details to help in strategic decision-making: Portfolio Probability Possible return Transatlantic Transaction 0,6 0,3 0,1 20% 15% 30% Moderated Mediums 0,6 0,3 0,1 14% 12% 30% You are required to calculate the expected return of your grandmother's portfolio. 1. 2,96 2. 4,54% 3. 7,20% 4. 12,50% − − Question 3 Complete Mark 1.00 out of 1.00 Asher Investment Fund, a diversified investment entity, currently has a total capital of R100 000 allocated across three distinct shares. The returns on these shares vary, reflecting the different risk profiles and market positions of each investment. The fund's capital is distributed as follows: Shares Return Invested A 14,5% R60 000 B 9,2% R25 000 C 15,4% R15 000 The current risk-free rate stands at 5%, and market returns for the upcoming period have been estimated based on the following probability distribution: Probability Market return 0,25 10% 0,35 12% 0,30 13% 0,10 16% What is the beta coefficient of the investment fund? 1. 0,85 2. 1,13 3. 1,15 4. 1,30 Question 4 Complete Mark 1.00 out of 1.00 Deserved Dish, a subsidiary of Basket of Gold Events, finds itself at a pivotal juncture in its growth trajectory. With a substantial allocation of R5 million for capital expansion in the upcoming year, the management of Deserved Dish is confronted with a critical decision regarding investment strategy. Recognizing the imperative to diversify risk and maximize returns, the company aims to select from two potential investment opportunities. Probability of occurrence Rate of return Project 1 Project 2 30% 14% 8% 40% 10% 16% 30% 8% 22% You are required to calculate the expected return for these two projects. 1. Project 1 3,53% ; Project 2 5,13% 2. Project 1 10,60%; Project 2 15,40% 3. Project 1 8,20%; Project 2 8,80% 4. Project 1 2,45%; Project 2 6,89% = = = = = = = = Question 5 Complete Mark 1.00 out of 1.00 Liberty Wealth is considering the acquisition of some risky assets. This acquisition is expected to cause an increase in the portfolio's beta, reflecting a higher level of systematic risk. Additionally, there has been an increase in expected inflation, which affects the inflation premium. The initial portfolio assessment is as follows: Initial beta 1,00 Initial required return 10,20% Market risk premium 6% After the acquisition of the risky assets and changes in inflation: Percentage increase in beta 30% Increase in inflation premium 2% What is the share’s required rate of return after accounting for the increase in beta and the rise in the inflation premium? 1. 12% 2. 14% 3. 17% 4. 20% Question 6 Complete Mark 1.00 out of 1.00 A company has the opportunity to invest in one of three possible investments. The financial analysts predict the following possible outcomes for the three investments: Outcome Probability Investment C: Expected return Investment D: Expected return Investment E: Expected return Pessimistic 30% 2% 8% 6% Most likely 40% 10% 10% 8% Optimistic 30% 18% 12% 11% Calculate the range of returns for the three investments. 1. Range of outcomes: C 8%; D 2%; E 3% 2. Range of outcomes: C 20%; D 20%; E 17% 3. Range of outcomes: C 1%; D 2%; E 3% 4. Range of outcomes: C 16%; D 4%; E 5% Question 7 Complete Mark 1.00 out of 1.00 Question 8 Complete Mark 1.00 out of 1.00 Let Us Protect You is considering investing in a new project that offers various potential rates of returns. To assess the feasibility and risk associated with this investment, the company has compiled a probability distribution of returns from the project. The probability distribution of returns from the project is as follows: Probability Return 20% 15% 30% 30% 50% 40% You are required to calculate the coefficient of variation for this investment 1. 0,278 2. 0,402 3. 0,531 4. 0,806 − Athena has a bond with a current selling price of R1 123 and a par value of R1 000. The bond has a 30-year term and is currently selling at a yield of 7%. If the coupon rate is 9%, paid quarterly, how many years are left until maturity? 1. 2,45 years 2. 7,50 years 3. 8,11 years 4. 16,23 years Question 9 Complete Mark 1.00 out of 1.00 Question 10 Complete Mark 1.00 out of 1.00 If a 30-year bond with a par value of R1 000 and an annual coupon rate of 1,12% currently sells for R120,94, and assuming the yield to maturity remains constant, what would be the price of the bond five years from now?" 1. R128,40 2. R135,78 3. R143,45 4. R220,39 Ella purchased a zero coupon bond with a par value of R1 000 and a maturity of 20 years, for R380. If the yield to maturity on the bond remains unchanged, what will the price of the bond be six years from now? 1. R380,65 2. R507,98 3. R508,07 4. R550,23 Question 11 Complete Mark 1.00 out of 1.00 Question 12 Complete Mark 1.00 out of 1.00 Patagonia Travel has a bond outstanding with a 6,5% coupon rate and a market price of R945,79. If the bond matures in four years and interest is paid semi-annually, what is the yield to maturity? 1. 4,06% 2. 8,11% 3. 9,50% 4. 12,25% Funded Farmers has issued outstanding bonds with the following characteristics: Par value: R1 000 Maturity: 25 years Yield to maturity: 9,25% annually Interest payments: Semi-annually Current selling price: R850 What is the bond's annual coupon interest rate? 1. 7,25% 2. 7,32% 3. 7,70% 4. 7,95% Question 13 Complete Mark 1.00 out of 1.00 Which of the following statements are correct concerning the theories of the term structure of interest rates? a. The expectation theory reflects the investors’ expectations about future interest rates and inflation; an increase in inflation expectation results in a downward sloping yield curve. b. The liquidity preference theory suggests that borrowers are willing to pay high interest rates for short-term financing than long term financing hence the yield curve is upward sloping. c. The market segmentation theory suggests that the market for loans is segmented on the basis of maturity and that the demand and supply factors determine the prevailing interest rate. The slope of the yield curve is influenced by the demand and supply relationship. d. The term structure of interest rates is the relationship between the maturity and the rate of return for bonds with similar levels of risk. 1. a and b 2. a and d 3. c and d 4. a, b and c Question 14 Complete Mark 1.00 out of 1.00 Question 15 Complete Mark 1.00 out of 1.00 Over the next three years, inflation is projected to be 6,20%, and the real interest rate is 3,15%. The yield on a three-year treasury security is currently 18,70%. What is the maturity risk premium for the three-year security? 1. 5,84% 2. 9,35% 3. 12,50% 4. 15,55% If the following bonds are identical, except for coupon payments, what is the price of Bond F? Bond Par value Coupon payment Time to maturity Price Bond G R1 000 R72 (monthly) 15 years R4 260 Bond F R1 000 R108 (monthly) 15 years ? 1. R 1 620,11 2. R 6 352,56 3. R 8 681,22 4. R12 687,72 Question 16 Complete Mark 1.00 out of 1.00 Question 17 Complete Mark 1.00 out of 1.00 Organic Crowd is preparing to pay its first dividend. It is going to pay R1,20, R1,45, and R2 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be R2,50 per share indefinitely. What is this stock worth to you per share if you demand a 10,8% rate of return on stocks of this type? 1. R21,28 2. R20,75 3. R22,99 4. R23,15 Banyon Ridge Manufacturing made two announcements about its equity shares today. First, the company stated that the next annual dividend will be R2,65 per share. Second, all subsequent dividends will decrease by 1,6% per year. If you require a 12% rate of return, what is the maximum price you should pay for a share of this equity today? 1. R 19,49 2. R 22,42 3. R 25,48 4. R186,85 Question 18 Complete Mark 1.00 out of 1.00 Question 19 Complete Mark 1.00 out of 1.00 Life Day Health, a pharmaceutical company, has never paid a dividend. Its current free cash flow (FCF) of R400 000 is expected to grow at a constant rate of 5%. The weighted average cost of capital (WACC) is 12%. What is the company’s estimated value of operations? 1. R 448 000 2. R 420 000 3. R3 500 000 4. R6 000 000 A share is trading at R606,82 per share. The share is expected to have a year-end dividend of R8,50 per share, and it is expected to grow at some constant rate throughout. The share’s required rate of return is 11% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of the constant growth rate? 1. 2,29% 2. 6,59% 3. 9,60% 4. 12,23% Question 20 Complete Mark 1.00 out of 1.00 High Energy Electric announced today that it will start paying annual dividends next year. The first dividend will be R1,23 per share. The dividends for the next four years will be R1,15, R1,20, R1,50, and R1,60 per share, respectively. After this period, dividends are expected to grow by 4% annually. How much would you be willing to pay for one share of this stock today if you require an 8,5% rate of return? 1. R27,86 2. R29,79 3. R32,32 4. R36,98