Project #64256 - Financial Management

  1. In March 2015, you joined a private banking firm as a relationship manager. As your first assignment, your boss asked you to join her for a client meeting with Mr. Liew. During your discussion with client, you understand that Mr. Liew is 60 years old this year and has recently divested his logistics and transportation business for $1.5 million. He intends to retire and hopes to invest the proceeds in income generating financial assets.

    In particular, he mentioned this stock called ‘China Merchants Holdings (Pacific) Limited’ (“CMH”) pays decent dividends. This company is a leading toll road company focused on investing in and managing toll roads in the PRC. It is currently trading at $1.10 and he is unsure if this is an attractive investment.

    At your request, your firm’s equity research department furnished you with their 5-year dividend forecast for this counter:

page2image13152
page2image14368
page2image14640
page2image15184

Dividend Per Share (Cents)

page2image16872
page2image17032
page2image17840
page2image18224

Year

page2image19560
page2image20232

2019

8.5

2018

8.0

page2image27000
page2image27544

2017

page2image28920
page2image29464
page2image30160

7.5

page2image31536

2016

7.5

page2image34168
page2image34712

2015

page2image35976
page2image36784
page2image37480

7.0

page2image38744

The dividends are anticipated to grow at 4% a year from 2020 onwards. They also told you that the market risk premium is 5% and the risk-free rate is 3%. The beta and standard deviation of CMH is 0.9 and 25% respectively.

Alternatively, Mr. Liew is thinking of allocating a certain portion of his investments in a safer asset class like bonds. You suggested for him to consider bonds issued by OCBC bank and the salient terms are detailed as follows:

  • ï‚·  Issue date = March 2009

  • ï‚·  Amount issued = $712 million

  • ï‚·  Maturity date = March 2019

  • ï‚·  Interest = 5.60% a year (before March 2014) and 7.35% a year thereafter

    ï‚· ï‚· Payment = Semi-annually Par value = $100.00

OCBC received an Aa2 credit rating by Moody’s and the credit spread for corporate bonds with similar rating is 1%. The standard deviation of OCBC bond is 10% and the correlation coefficient between CMH and OCBC bonds is -0.6.

The third option is to purchase a life annuity offered by your firm. This annuity scheme will make a payout of $2,000 at the end of each month for as long as policyholder shall live. Given Mr. Liew’s health condition, he expects his life expectancy to be that of an average Singaporean, which is 82 years.

You will be having a follow up meeting with Mr. Liew next week and your boss needs you to address the issues raised at the last meeting as well as evaluate the risk and return of a portfolio comprising CMH stock and OCBC bond in the following combinations:

 
 
 
 
page3image11840
 
page3image12648
page3image12920

CMH stock

 
page3image14320
 
page3image14864
page3image15136
page3image15520

OCBC bond

 
page3image16808
 
page3image17616
page3image17888
 
 
 

100%

 
 

0%

page3image21056
 
page3image21600
 
 

80%

 
page3image23384
 

20%

page3image24664
 
page3image25208
 
 

60%

page3image26584
 
page3image27128
 
page3image27824
 

40%

 
page3image29200
 
 

40%

page3image30728
 
page3image31272
 

60%

 
page3image32784
 
 

20%

 

80%

page3image35416
 
page3image35960
 
 

0%

page3image37224
 
page3image38032
 
page3image38728
 

100%

 
page3image39992

Question1

Calculate China Merchants Holdings (Pacific) Limited’s cost of equity by applying the Capital Asset Pricing Model (CAPM).

(10 marks)

Question2

Calculate the net present value of China Merchants Holdings (Pacific) Limited’s dividends and advise Mr. Liew whether he should consider investing in this stock.

(20 marks)

Question3

Apply principle of time value of money to calculate the fair market value of OCBC bond.
(15 marks)

Question4

Calculate the value of the life annuity offered by your firm. Assume the interest rate for annuities to be 4%.

(15 marks)

 

Question5

Calculate the expected return and standard deviation of the two-asset portfolio and plot a graph to illustrate the data points. Assume the expected return on CMH stock and OCBC bond is 9% and 4% respectively.

Recommend a portfolio mix to Mr. Liew on the presumption that he is a risk adverse investo r.

 

(30 marks)

Question6

‘The beta and standard deviation of CMH is 0.5 and 25% respectively.’ Distinguish between the two measures of risk i.e. beta and standard deviation

(10 marks) 

Subject Business
Due By (Pacific Time) 03/29/2015 2330
Report DMCA
TutorRating
pallavi

Chat Now!

out of 1971 reviews
More..
amosmm

Chat Now!

out of 766 reviews
More..
PhyzKyd

Chat Now!

out of 1164 reviews
More..
rajdeep77

Chat Now!

out of 721 reviews
More..
sctys

Chat Now!

out of 1600 reviews
More..
sharadgreen

Chat Now!

out of 770 reviews
More..
topnotcher

Chat Now!

out of 766 reviews
More..
XXXIAO

Chat Now!

out of 680 reviews
More..
All Rights Reserved. Copyright by AceMyHW.com - Copyright Policy