1BAO3403 Investment and Portfolio ManagementBlock 3, Semester 2 2021Assessment 3Instructions: This is an individual assessment and covers material you learnt in sessions 6 and 7. Youare required to do it independently. Your answers will be not examined before the assignment isformally submitted to the drop box before the due time. Submit your assignment as a word documentshowing your name and student ID on the first page. You are required to show all the formulas anddetailed calculations you have performed in the word document in order to receive full marks. Thisassignment or part of it will not be accepted via email before or after the due date. The maximumsimilarity score accepted is 20% and the penalty for late submissions without an application for specialconsideration is 20% of the marks achieved per day. Excel files submitted will not be marked. If youencounter any issue when uploading the assignment, send me a screen shot that clearly shows the issue.Due date: 22 October 2021 by 11.59pmCase study 1Part a.You are an investment adviser. One of your clients approaches you for your advice on investing inequity shares of Theta Company. You have collected the following data:Earnings per share at the end of this year $10.00Retention ratio 0.60Return on equity 0.25Cost of equity capital 0.20The company plans to decrease the retention ratio to 40% from year 6.Required:i) Estimate the price of an equity share of this company using two-period dividend discountmodel and advise your client whether they should buy a share of the company. ii)Your client is keen to know whether there are any positive growth opportunities from theirinvestment. Explain to your client the meaning of this concept using appropriate calculations. iii)If there are positive or negative growth opportunities, explain the reason for suchopportunities. 17+2+1 =20 marks2Part b.You are a senior financial analyst of a firm based in Sydney. You have been assigned with the task oftraining interns who recently joined your firm on how to use the free cash flow model to estimate thevalue of a company. You have collected data on the following data: Year20202021202220232024Interest rate on long-term debt (%)4.05.05.54.05.0EBIT ($M)40,00037,00045,00050,000Depreciation ($M)38,00036,00039,00041,000Cap Spending ($M)34,15035,00036,00040,000Cost of equity0.110.120.100.12WACC0.130.140.150.13Number of equity shares (Million)3,000Terminal growth rate0.06Tax rate0.30 The long-term debt in 2020 was $54000. The company plans an annual compound growth of 5% forthe long-term debt. The working capital of the company in 2020 was $10,000. The company plans anannual compound growth of 6% for the working capital.Using the information you have collected above, perform calculations to explain to interns as to howthe following are calculated:i. Free cash flow to firm ii.iii.iv.v.Free cash to equityValue of the firm according to the free cash flow to firm methodValue of the firm according to the free cash flow to equity methodEstimated price of an equity share according to the free cash flow to firm method and thefree cash flow to equity method Note: For parts i and ii prepare a table showing how free cash flow to firm and free cash flow toequity are calculated. Follow the example in the lecture notes for session 7.6+6+8+8+4 =32 marksCase study 2Part aYou are the portfolio manager of a large company that invests in many securities including corporatebonds. You have been assigned the task of bond portfolio management. You are provided with thefollowing data in relation to bonds:Maturity period 5 yearsCoupon rate 12%Par value $1,000Coupons on bonds are paid annuallyYield to maturity of bonds 9%3Required:i) Fill in the blanks in the following table Year (t)Cash flow (CFt)CFt/(1+y)tWtt*Wtt+t^2(t+t^2)*CFt/(1+y)t12345Notes:y = yield to maturityWt= weight for year t See the lecture notes for formulae ii)iii)Based on the calculations in part i, calculate modified duration and convexity of the bondUsing the modified duration, calculate the change in bond price in dollars when yield tomaturity changes by two percentUsing the convexity, calculate the change in bond price in dollars when yield to maturitychanges by two percentiv) 4+3+1+2 = 10 marksPart bThe following data relate to a corporate bond which pays coupons semi-annually:Settlement date 01 March 2018Maturity date 31 December 2040Coupon rate 10%Yield to maturity 9%Face value $1,000Percentage of face value paid back to the investor on maturity 100%Using the above data, calculate i.ii.iii.The flat price of the bondAccrued interestInvoice price of the bond Note: Show the assumptions, if any, you made in your calculations.3+2+1 = 6 marks4Part cA company must make a payment of $23,316 in 11 years. The market interest rate is 8%. The company’sportfolio manager wishes to fund the obligation using four-year zero-coupon bonds and perpetuitiespaying annual coupons.How can the manager immunize the obligation?Suppose that three years have passed, and the interest rate remains at 8%. Is the position still fullyfunded? Is it still immunized? If not, what actions are required?8 marksTotal = 76 marks

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