FIN2601 Assignment 2 (ANSWERS + WORKINGS) Semester 1 2024 - DISTINCTION GUARANTEED

FIN2601 Assignment 2 (DETAILED ANSWERS) Semester 1 2024 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references .. Question 1 Not yet answered Marked out of 1.00 ' Flag question Le Panier French Bakery, a cupcake business, has recorded the following returns over the last four years: Year Return 2020 —3,5% 2021 —5,0% 2022 65% 2023 13,7% What is the average return on the company's shares? 0 1. 17,6% 0 2. 18,8% 0 3. 56,5% 0 4. 70,2% Two shares, Canva and Green Tone have been identified by Tristan as potential investments. He has estimated the performance of the returns on these two shares under each of the following economic conditions as follows: Possible outcome Probability Rate of return Canva Green Tone Pessimistic 0,15 —2,0% 5,0% Most likely 0,65 9,2% 6,2% Optimistic 0,20 15,4% 7,4% You are required to calculate the standard deviation for these two shares. 0 1. Canva = 7,53%; Green Tone = 6,26% 0 2. Canva = 5,13%; Green Tone = 0,71 % 0 3. Canva = 21,88%; Green Tone = 31,00% 0 4. Canva = 26,60%; Green Tone = 9,00% 3 Marked out of 1.00 r Flag question Supportive Supplements, a supplement business, is owned by Annalise. She is interested in assessing the demand for the supplements and believes the following probability distribution exists: Demand for the product Probability of this demand occurring Rate of return if this demand occurs Strong 0,30 30% Above average 0,40 12% Below average 0,25 1% Weak 0,05 —6% What is the coefficient of variation on the demand for the product? 0 1. 0,862 0 2. 1,159 0 3. 3,823 0 4. 4,760 Marked out of 1.00 r Flag question Kyneacare is a health and wellness business comprising four main subsidiaries. The percentage of its business derived from each subsidiary, along with their respective betas, is as follows: Subsidiary Percentage of business Beta Health care 20% 0,80 Health coach 35% 0,95 Healthy food 30% 1,50 Health and fitness 15% 1,25 Assuming the risk-free rate is 9% and the market risk premium is 7%, what is the company's required rate of return? 0 1. 3,58% 0 2. 10,25% 0 3. 11,26% 0 4. 16,91% You are contemplating an investment in two securities, Highbull and Slowbear, with the following probability distributions and possible returns: Security Probability Possible return Highbull 0,3 —10% 0,4 10% 0,3 30% Slowbear 0,3 40% 0,4 —20% 0,3 30% You are required to calculate the expected return of a portfolio totalling R20 000, with R15 000 allocated to security Highbull and the remainder in security Slowbear. 0 1. 3,25% 0 2. 7,50% 0 3. 10,75% 0 4. 11,50% Dynamic Technologies has bonds on the market with 15 years to maturity, a yield¬to-maturity of 9,2%, and a current price of R995,09. The bonds make monthly payments. What is the coupon rate? 0 1. 4,57% 0 2. 7,62% 0 3. 9,14% 0 4. 11,60% Healthy Alternatives Fast Food has a 6% coupon bond outstanding that matures in 10 years, with interest payments made every six months. The par value of the bond is R1 000, and the yield to maturity is 7,58%. What is the market price per bond? 0 1. R890,61 0 2. R891,94 0 3. R898,45 0 4. R899,26 Dynamic Technologies has bonds on the market with 15 years to maturity, a yield¬to-maturity of 9,2%, and a current price of R995,09. The bonds make monthly payments. What is the coupon rate? 0 1. 4,57% 0 2. 7,62% 0 3. 9,14% 0 4. 11,60% Healthy Alternatives Fast Food has a 6% coupon bond outstanding that matures in 10 years, with interest payments made every six months. The par value of the bond is R1 000, and the yield to maturity is 7,58%. What is the market price per bond? 0 1. R890,61 0 2. R891,94 0 3. R898,45 0 4. R899,26 Accounts Craftsmen bonds feature a coupon rate of 8,20% and pay interest every three months. Each bond is currently priced at R870, with a par value of R1,000. The bonds will mature in 12 years. What is the yield to maturity? 0 1. 2,52% 0 2. 5,46% 0 3. 8,61% 0 4. 10,08% 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? 0 1. 5,84% 0 2. 9,35% 0 3. 12,50% 0 4. 15,55% Accounts Craftsmen bonds feature a coupon rate of 8,20% and pay interest every three months. Each bond is currently priced at R870, with a par value of R1,000. The bonds will mature in 12 years. What is the yield to maturity? 0 1. 2,52% 0 2. 5,46% 0 3. 8,61% 0 4. 10,08% 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? 0 1. 5,84% 0 2. 9,35% 0 3. 12,50% 0 4. 15,55% Mount Natural is a pharmaceutical company that has the opportunity to invest in one of two investments, Naturemaderx and Medimpact. Each investment costs R100 000. Financial analysts predict the following possible outcome for the two investments: Outcome Probability Naturemaderx Medimpact expected return expected return Pessimistic 0,20 4% 8% Most likely 0,60 10% 12% Optimistic 0,20 16% 16% You are required to calculate the range of returns for the two investments. 0 1. Naturemaderx: 4%; Medimpact: 2% 0 2. Naturemaderx: 6%; Medimpact: 6% 0 3. Naturemaderx: 8%: Medimpact: 12% 0 4. Naturemaderx: 12%; Medimpact: 8% Suppose you purchase a bond that has an 8,5% annual payment coupon. The bond has a par value of R1 000 and a maturity of 25 years, for R925. If the yield to maturity on the bond remains unchanged, what will be the price of the bond five years from now? 0 1. R 320,91 0 2. R 663,64 0 3. R 930,20 0 4. R1 953,15 Modern Arch Construction has a semi-annual coupon bond with a 7% coupon rate, a par value of R1 000, and a current market price of R824,18. The bond has a yield to maturity of 10%. How many years are remaining until this bond matures? m 1. 2,68 years m 2. 4,52 years m 3. 9,03 years m 4. 18,07 years Question 13 Sublime Analysis is selling 5-year bonds with a par value of R1 000 at a yield to Not yet answered maturity of 8%. How much will you have to pay for the bond? Marked out of 0 1. R106,67 1.00 ' Flag question 0 2. R508,35 0 3. R680,58 0 4. R752,69 Modern Arch Construction has a semi-annual coupon bond with a 7% coupon rate, a par value of R1 000, and a current market price of R824,18. The bond has a yield to maturity of 10%. How many years are remaining until this bond matures? m 1. 2,68 years m 2. 4,52 years m 3. 9,03 years m 4. 18,07 years Question 13 Sublime Analysis is selling 5-year bonds with a par value of R1 000 at a yield to Not yet answered maturity of 8%. How much will you have to pay for the bond? Marked out of 0 1. R106,67 1.00 ' Flag question 0 2. R508,35 0 3. R680,58 0 4. R752,69 Which of the following implies an upward sloping yield curve? m 1. When the return on bonds with a higher default risk is higher than the return on bonds with a lower default risk m 2. When the return on bonds with a lower default risk is higher than the return on bonds with a higher default risk m 3. When the return on long-term securities is equal to the return on short-term securities m 4. When the return on short-term securities is lower than the return on long¬term securities of similar risk Which of the following implies an upward sloping yield curve? m 1. When the return on bonds with a higher default risk is higher than the return on bonds with a lower default risk m 2. When the return on bonds with a lower default risk is higher than the return on bonds with a higher default risk m 3. When the return on long-term securities is equal to the return on short-term securities m 4. When the return on short-term securities is lower than the return on long¬term securities of similar risk Analytical Engineering, in light of the market response to its dividend policy, has opted to raise its dividend payment annually by 4,5%. The company's latest dividend stands at R5,15, and the required rate of interest is 10%. What is the maximum amount you would be willing to pay for a share of the ordinary equity? 0 1. R23,18 0 2. R48,22 0 3. R89,42 0 4. R97,85 High Bar Electric, an electrical company, recently distributed a dividend of R2,00 per share, and the shares are currently in equilibrium. The company exhibits a constant growth rate of 5% and a beta of 1,5. The required rate of return on the market is 15%, and the risk-free rate is 7%. The company is contemplating a policy change that would raise its beta coefficient to 1,75. Assuming market conditions remain unchanged, what is the new constant growth rate that will keep the ordinary share price of the company unchanged? 0 1. 6,76% 0 2. 7,67% 0 3. 8,95% 0 4. 9,69% Rosemary is considering an investment in the ordinary shares of Global Ag Services, a farming company that is projected to commence dividend payments at the end of the upcoming year. The expected dividends for the next three years are as follows: Year Dividend 1 R3,00 2 R4,25 3 R6,00 She anticipates selling the share for R100 at the end of the three-year period. To determine the current worth of the share, assuming a required return of 12%, what is the present value of the expected future cash flows? 0 1. R46,79 0 2. R64,34 0 3. R77,24 0 4. R81,52 Sprouting Beauties, a baby clothing company, currently does not pay any dividends. However, the company intends to initiate dividend payments at a rate of R2 per share, with a projected growth rate of 20% per year for the next two years and a constant growth rate of 7% thereafter. The company's share has a beta of 1,2, and considering a risk-free rate of 7,5% and a market risk premium of 4%, what is your estimate of the share's current price? 0 1. R50,52 0 2. R51,08 0 3. R56,76 0 4. R58,14 Question 18 Not yet answered Marked out of 1.00 r Flag question Sprouting Beauties, a baby clothing company, currently does not pay any dividends. However, the company intends to initiate dividend payments at a rate of R2 per share, with a projected growth rate of 20% per year for the next two years and a constant growth rate of 7% thereafter. The company's share has a beta of 1,2, and considering a risk-free rate of 7,5% and a market risk premium of 4%, what is your estimate of the share's current price? 0 1. R50,52 0 2. R51,08 0 3. R56,76 0 4. R58,14 Question 19 Not yet answered Marked out of 1.00 ¥ The Crypto Group's current share price is R36 and its last dividend was R2,40 (D0 = R2,40). In view ofthe company’s strong financial position and its consequent low risk, its required rate of return is only 12%. If dividends are expected to grow at a constant rate in the future and if the required rate of return is expected to remain at 12%, then what will be the company's expected share price five years from now? O 1. R41,67 O 2. R43,75 O 3. R45,95 O 4. R48,24 Question 20 Not yet answered Marked out of 1.00 F Flag question Silver Bullet Consulting has recently disbursed an annual dividend of R1,36 per share. The company intends to pay annual dividends of R1,40, R1,46, and R1,58 over the next three years, respectively. Subsequently, the dividends will be maintained at a constant rate of R1.60 per share. Considering a required return of 9%, what is the current valuation of this share? O 1. R 4,98 O 2. R17,46 O 3. R18,82 O 4. R19,78