MSc Finance Exam: Investment Analysis & Portfolio Management, Study Guides, Projects, Research of Finance

Download MSc Finance Exam: Investment Analysis & Portfolio Management and more Study Guides, Projects, Research Finance in PDF only on Docsity! Department of Accounting and Finance M.Sc. Finance And M.Sc. International Accounting and Financial Studies Finance I and II Wednesday 9th January 2008 10.00am – 1.00pm (3 hours) Instructions for Candidates Answer ALL Questions from Section A (in the spaces provided), ONE Question from Section B (in the answer book) and ONE Question from Section C (in the answer book) [Failure to comply will result in papers not being marked] Calculators must not be used to store text and/or formulae nor be capable of communication. Invigilators may require calculators to be reset. All answers are to be written in the spaces provided in ink. Please write clearly as illegible writing cannot be marked. If more space is required the answer can be continued on the back of the page where the question appears. Failure to follow these requirements will lead to a deduction of marks. To Be Issued: Discount Tables Family Name: Other Name: Course (please indicate by ticking appropriate box) M.Sc. Finance M.Sc. IAFS For Examiners Use Only SECTION A TOTAL MARKS c) Determine the approximate value of its payback period and discounted payback period and comment on your results. (2 marks) d) A loan of £80,000 can be arranged with a bank to finance the investment. The loan would have to be repaid in six equal instalments of £19,458. Determine the effective interest rate on the loan. (2 marks) Q2. Drefach Ltd is considering an investment in an open cast mining operation. The project will require an outlay of £10m at the outset and is expected to produce a constant annual net cash flow of £2.638 million for the next four years. In year five the sale of some equipment will boost the net cash flow to £4.49 million. The mining will stop at the end of year five and in year six the company will incur a cost of £2.0 million to restore the land to its former state. Determine the modified rate of return on the investment if the company’s required rate of return is 8 per cent. (3 marks) Q4. Braehead Manufacturing has been offered a contract to supply some components to Pollock Pumps for the next five years. The work would be undertaken in the company’s factory where it has considerable spare capacity. The components will be produced using for machinery that it has been planning to sell. This machinery was bought five years ago for £12 million and now has a book and tax value of £6 million. It has been written off for tax purposes on a straight line basis over an assumed working life of ten years, as required by the tax authorities. If sold now it is anticipated that it would realise £2.4 million. It would have little or no resale value if used to produce the components for the next five years. The project would require an investment in working capital of £2 million. The contract would be for 4 million units a year at a price of £2.00 each. The cost of production estimated by the factory accountant, excluding the cost of the factory space and machinery, is as follows: Materials £0.40 per unit Labour £0.80 per unit Power etc. £0.20 per unit Overheads £0.40 per unit The overheads are allocated on the basis of direct labour costs. Is this a profitable investment if the required rate of return is 8 per cent and the tax rate is 40 per cent? (7 marks) Q5. a) Given the following variance-covariance matrix for five securities determine the risk of an equally weighted portfolio of the five securities. 1 2 3 4 5 1 289 153 136 190 210 2 153 225 240 110 230 3 136 240 400 120 130 4 190 110 120 195 131 5 210 230 130 131 590 (4 marks) b) Assume that the average variance and covariance calculated based on the five securities above are representative of securities traded on the stock exchange. Draw a diagram to illustrate how the risk equally weighted portfolios will change as the number of securities included in the portfolio increases. The diagram should include as much information as you consider necessary to illustrate the nature of the results (3 marks) Q8. The beta of Arnott plc’s shares has been estimated to be 1.3 and the expected rate of return on the market portfolio is 14 per cent while the risk free rate is 6 per cent. The market rate of return last year was only 4 per cent. The rate of return on Arnott’s shares was even lower at 1 per cent. Analyse the performance of Arnott’s shares over the last year (it can be assumed that the expected return can be explained by the CAPM). (3 marks) Q9. Ayr plc has two divisions, one produces specialised radio equipment and the other components for electronic monitoring sets. The demand for radio equipment is steady but the demand for the components, produced in a more automated capital intensive process is highly cyclical. The radio division accounts for 70 per cent of the company’s business and the components division for the residual 30 per cent. Management is setting the cost of capital for these divisions. The risk free rate is 6 per cent and the expected return on the market is 15 per cent. The beta of the company’s shares have been estimated at 1.55 and the company is financed by 40 per cent debt and 60 per cent equity. There is a company quoted on the stock market that simply produces specialised radio equipment and its shares have a beta of 0.8: this company is financed 75 per cent equity and 25 per cent debt. What rates of return should be set for the two divisions of Ayr plc? (4 marks) Q10. The cost of a call with an exercise price of 120p on a share currently selling at 102p is 16p. Draw a profit graph for a covered call, and determine the profit at the expiry of the call for the following share prices Share Price 80 90 100 110 120 130 140 Profit Profit + Share Price - (3 marks) [Pleas e Turn Over] (3 marks) (TOTAL 50 MARKS) Section B Answer ONE Question Q1. a) Discuss the problems posed by inflation for capital budgeting. b) Discuss how overhead costs and working capital should be dealt with in the assessment of investment proposals. Q2 . Q3 . Q4 Dis crit Exp on t Exp for t (25 MARKS) uss the strengths and weaknesses of the internal rate of return as an investment rion. (25 MARKS) lain the constant rate of growth dividend model and discuss the insights it provides he determinants of share values. (25 MARKS) lain what is meant by a price-earnings ratio and discuss the factors responsible he differences in the price-earnings ratios reported in the financial press. (25 MARKS)