Mba6073 - Individual Assignment

MBA6073: FINANCIAL AND RISK MANAGEMENT
INVIDUAL ASSIGNMENT #1
Question 1 (20 marks)

a. You invest RM5,000 in a savings account that offers an annual interest rate of 6%,
compounded annually. How much will the investment be worth at the end of 10 years?
(3 marks)
b. You need RM100,000 to buy a car in 5 years. If you can earn an annual interest rate of 4% on
your investments, how much do you need to invest today?
(3 marks)
c. You plan to save RM1,200 at the end of each year for the next 15 years in an account that
earns 5% interest annually. What will be the value of your savings at the end of 15 years?
(3 marks)
d. An insurance company promises to pay you an annuity of RM48,000 at the end of each year
for the next 20 years. If the discount rate is 7%, what is the present value of this investment?
If the company requires you pay a lump sum of …………………….., would you be willing
to accept this investment? Justify.
(4 marks)
e. You invest RM3,000 in an account that pays an annual interest rate of 6%, compounded
quarterly. What will be the value of the investment after 7 years?
(3 marks)
f. You are planning to borrow RM400,000 housing loan from a bank. The bank is charging 5%
annual interest, and the loan is for 30 years. Determine the amount year payment.
(4 marks)

A company just declared and paid RM0.20 dividend per share. The company cost of capital is 14%
and the dividend growth rate is estimated to be 5% per year forever. The company stock is currently
selling for RM4.80 per share.
a. Based on the given information, determine the appropriate model to determine the value
of the firm’s stock. What are the necessary assumptions used by this model? Provide the
equation of the model.
(7 marks)
b. Determine the market value of the firm stock.
(8 marks)
c. As an investor you are considering to buy a company’s stock. Based on the computed
value of the company stock, should you buy the stock? Justify.
(5 marks)
A bond currently selling for RM920. The coupon rate of the bond is 8% paid semiannually and has 9
years to maturity. Your required rate of return is 12%.
a. What is the value of the bond?
(4 marks)
b. Should you consider buying this bond?
(4 marks)
c. Is the yield to maturity of this bond greater or lower than your required rate of return?
Justify.
(4 marks)
1
d. What is a bond sinking fund? Why is it important for a company to establish a sinking
fund?
(4 marks)
e. Describe two ways in which a sinking fund can be handled.
(4 marks)
a. An insurance agent proposes two investment options (Investment A and
Investment B) which pay the following annual payments. Both investments
will guarantee payments at the end of each year for 4 years. The terms of
each of the investments are as listed below:
Investment A Investment
Payments B
Payments
Year 1 RM3 million RM2 million
To enjoy the annual payments, both investments require an initial

investment of RM9.2 million.
Supposed you required rate of return is 12%, which of the two investment
should be considered? Justify and show all calculations.
(8 marks)
b. You are given the monthly stock prices for two companies listed on Bursa
Malaysia in 2022: Garuda Berhad and Merak Berhad.
Month Garuda Merak Berhad HPR HPR
Berhad Stock Stock Price Garuda Merak
Price (RM) (RM) Berhad Berhad
January 1.20 2.20
February 1.40 2.40
March 1.35 2.50
April 1.25 2.20
May 1.40 2.40
June 1.45 2.32
July 1.51 2.45
August 1.50 2.42
Septemb 1.48 2.45
er
October 1.30 2.44
Novembe 1.38 2.45
r
Decembe 1.65 2.54
r
a. Compute the monthly holding period returns (HPR) of each stock.

(3 marks)
2
b. Compute the average or expected rate of return for each stock. Based
on the expected rate of return, which stock should be selected for
investment? Why?
(2 marks)
c. Using n-1 degree of freedom, compute the standard deviation of each
stock. Based on the standard deviation, which stock should be
considered for investment? Why?
(3 marks)
d. Compute the coefficient of variation of each stock? Based on this
measure, which stock should be considered for investment? Why?
(2 marks)
e. Explain the nature of the relationship between risk and rate of return.
(2 marks)
a. You have just purchased an outstanding noncallable, 15-year bond with a

par value of RM1,000. The bond pays 6% interest with semiannual
compounding. Based on the prevailing market interest rate, you
considered 8% required rate of return is appropriate to value the bond.
Determine the value of the bond. If the bond is selling for RM1,200,
should you buy the bond? Kindly show all calculations.
(3 marks)
b. Define bond’s yield to maturity (YTM) from the perspective of a
bondholder. Provide a formula that can be used to estimate the YTM of
this bond. Using the formula, determine the YTM of this bond. Is the YTM
higher or lower than your required rate of return? Based on the estimated
YTM, is this bond a good buy?
(2 marks)
c. What is the difference between stock’s market price and its intrinsic
value? Why do investors and managers need to understand how to
estimate a firm’s stock intrinsic value.
(2 marks)
d. Saniyo Berhad just declared and paid a RM0.80 dividend per share. The
company’s analyst indicates that the dividend of the company will grow at
a constant rate of 5% per year. The required rate of return on this stock is
10%. What is the stock’s intrinsic value per share? If the stock is currently
selling for RM18.00 per share, is it a good buy? Justify.
(2 marks)
e. As a newly appointed financial officer of a company, you have estimated
the following free cash flows (FCFs) for your company. The company just
uses equity and debt capital.
Yea FCF
r RM
million
1 90
2 120
3
3 180
4 200
5 220
After the fifth year, the free-cash flow will grow at a constant rate of 2 per
cent per annum forever.
i. What is the value of the company if its cost of capital is 8 per cent?
Show your calculations.
(3 marks)
ii. If the value of debt is RM4 billion, what is the firm’s value of equity?
(2 marks)
iii. Suppose the firm has 2 billion shares outstanding, what is the value of
the firm stock price?
(2 marks)
iv. What is the main advantage of using free-cash flow (FCF) in
determining the value of a firm’s stock?
(2 marks)
v. If the current market price of the firm’s stock is RM3.80, should you
consider buying this stock? Justify your decision.
(2 marks)

Mba6073 - Individual Assignment

Uploaded by

Copyright:

Available Formats

Mba6073 - Individual Assignment

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mba6073 - Individual Assignment

Uploaded by

Copyright:

Available Formats

MBA6073: FINANCIAL AND RISK MANAGEMENT

Question 1 (20 marks)

Question 2 (20 marks)

To enjoy the annual payments, both investments require an initial

a. Compute the monthly holding period returns (HPR) of each stock.

a. You have just purchased an outstanding noncallable, 15-year bond with a

You might also like