EXAMINATION
ACFI 2070 Business Finance
Section 2 (36 marks)
Short-Answer Questions (12 marks each)
15. The table below provides information on two individual risky assets A and B, the market portfolio M and the risk-free asset F. Assume that the CAPM holds and all securities are correctly priced
|
Asset
|
Expected Return
|
Standard deviation σ
|
Beta
|
|
A
|
13%
|
38%
|
0.9
|
|
B
|
16%
|
54%
|
?
|
|
M
|
?
|
20%
|
1
|
|
F
|
4%
|
0%
|
0
|
Calculate the followings:
1). Expected return of market portfolio. (2 marks)
2). Systematic risk (Beta) of B. (2 marks)
3). Correlation between return on asset A and return on market portfolio (2 marks)
4). Sharpe ratio of market portfolio M (suppose the expected return is identical to the average of historic returns) (2 marks)
5). Suppose you wish to construct an equally weighted portfolio with only asset A and asset B, Assuming the correlation between A and B is 0. What are the expected return and systematic risk of this equally weighted portfolio? (2 marks)
6). Suppose you wish to construct a portfolio with only market portfolio M and risk-free asset F. What weighting scheme is required to achieve an expected portfolio return of 10%? (2 marks)
16. ABC Ltd has issued a 10% coupon bond with a face value of $1,000,000 and a maturity period of 10 years. The bond's yield is 8% per annum, compounded semi-annually (12 marks).
1. What is the total capital ABC Ltd can raise by issuing this coupon bond? (Round to the nearest cent). (6 marks)
2. If the yield decreases to 6% immediately after issuance, how will this change impact the bond's market price? (6 marks)
17. Estimate the price of a share that has just paid an annual dividend of $2 per share assuming that dividends are expected to grow at a rate of 5% p.a. for the next year, a further 10% for the second year and then a further 3% p.a. thereafter. The company has a market beta of 1.5, while the risk-free rate and the expected return on the market portfolio are 3% and 9%, respectively. Dividends are paid at each year-end. (12 marks)