Assignment Assessment Report

Campus: Level: Module Name: Students Name: e-mail id & Mob No Stream Mumbai PCL II Financial Services Mihir Joshi Mihir_j@hotmail.com BUSINESS Year/semester Assignment Type Assessors Name Reqd Submission Date Actual Submission Date Submitted to : 2011-2013 A Harish Sir 28/04/2013 26/04/2013 Harish Sir

Certificate by the Student: Plagiarism is a serious College offence. I certify that this is my own work. I have referenced all relevant materials. tudents Name/Signatures) Expected Outcomes General Parameters Clarity Analytical Thinking Research approach and innovative Assessment Criteria Grade based D,M,P,R system on k

Mihir Joshi (S Feedbac

Formatting & PresentationSubject Specific Parameters

Clear understanding of the concept Ability to analyze the problem realistically and take required actions Research carried out to reach the outcome and innovative methods used Concise & clear thinking along with presentation Ability to use the correct formula and take required actions. No. of exact answers established.

Correct Followed Alignment Outcom

Methodology

to

Desired

Grades P M D

Grade Descriptors A Pass grade is achieved by meeting all the requirements defined. Identify & apply strategies/techniques to find appropriate solutions Demonstrate convergent, lateral and creative thinking.

Achieved Yes/No (Y / N)

Assignment Grading Summary (To be filled by the Assessor) OVERALL ASSESSMENT GRADE: TUTORS COMMENTS ON ASSIGNMENT: SUGGESTED MAKE UP PLAN (applicable in case student is asked to re-do the assignment) REVISED ASSESSMENT GRADE TUTORS COMMENT ON REVISED WORK (IF ANY) Date: Assessors Name / Signatures:

Assignment A Questions Q1. LG, Appliances Company has the following dividend per share and the market price per share for the period 1995-2000: Year 1995 1996 1997 1998 1999 2000 Dividend per share 1.53 1.53 1.53 2.00 2.00 3.00 Market price 31.25 20.75 30.88 67.00 100.00 154.00

Calculate the annual rates of return for last 5 years. Also calculate the risk of share. Decision criteria for selecting one out of various seurities (a) if expected returns from various securities are same but their standard deviations are different then security with lower standard deviation should be performed. (b) if standard deviations from various securities are same but their expected returns are different then security with higher expected returns should be preferred.

(c) if expected returns and standard deviations of various securities are different then security with lower coefficient of variation should be preferred.

Solution:Calculation Of the annual rates of return for last five years 2000-1996 are as follows:(1) (2) (3) (4)= (2)+(3) Total Gain (5) Base year MP(Rs.) 31.25 20.75 30.88 67.00 100.0 0 Total (6)=(4)/(5)*100 Return(%) (28.704)% 56.192771% 123.4456% 52.238806% 57% 260.17317%

Year Dividend(Rs.) Capital Appreciation(Rs.) 1 2 3 4 5 1.53 1.53 2.00 2.00 3.00

(20.75-31.25)=(10.50) (8.97) (30.88-20.75)=10.13 (67-30.88)=36.12 (100-67)=33 (154-100)=54 11.66 38.12 35 57

Decision criteria for selecting one out of various securities If standard deviations from various securities are same but their expected returns are different then security with higher expected returns should be preferred.

Year 1996 1997 1998 1999 2000

R -28.70 56.19 123.45 52.24 57 R =260.18

(R-R) -80.74 4.15 71.41 0.20 4.96

(R-R)2 6518.95 17.22 5099.39 0.04 24.60 11660.20

Average return Average variance Standard Deviation

= 260.18/5 = 11660.20/5 = 2332.04

= 52.04 =2332.40 = 48.29

Q2. The historical rates of return of two securities over the past ten years are given. Calculate the Covariance coefficient of the two securities: Years 1 2 3 4 Security 1 (return percent) 12 8 7 14 Security 2 (return percent) 20 22 24 18

5 6 7 8 9 10

16 15 18 20 16 22

15 20 24 25 22 20

Solution:Calculation of covariance coefficient of security1 and security 2 are as follows:-

Year 1 2 3 4 5 6 7 8 9 10

R1 12 8 7 14 16 15 18 20 16 22 R1=14.8

R2 20 22 24 18 15 20 24 25 22 20 R2=21

R1 R1 -2.8 -6.8 -7.8 -0.8 1.2 0.2 3.2 5.2 1.2 7.2

R2 R2 -1 1 3 -3 -6 -1 3 4 1 -1

(R1 R1)2 7.84 46.24 60.84 0.64 1.44 0.04 10.24 27.04 1.44 51.84 207.60

(R2 R2)
2

(R1 R1) (R2 R2) 2.8 -6.8 -23.4 2.4 -7.2 -0.2 9.6 20.8 1.2 -7.2 -8.00

1 1 9 9 36 1 9 16 1 1 84

R1 = R1/ No. of years = 148/10 = 14.8 R2 = R2/ No. of years = 210/10 = 21 Variance R1 = 207.60/9 = 23.07 Std. Dev1 = 23.07 = 4.803 Variance R2 = 84/9 = 9.33 Std. Dev2 = 9.33 = 3.055 Co-variance S1S2 = -8/9 = -0.889 Co-relation S1S2 = Co-variance S1S2/ ( std devS1) (std dev S2) = -0.889/4.803*3.055 = -0.061

Q3. An investor wants to build a portfolio with the following four stocks. With the given details, find out his portfolio return and portfolio variance. The investment is equally spread over the four stocks. Market return = 10, Market variance= 27 Security A B C D Residual value 45.00 130.00 199.00 53.00 Alpha 0.50 2.50 1.50 2.50 Beta 0.90 1.30 1.40 2.10

Solution:(i) Assume that all securities A,B,C and D are invested in equal value weight (0.25) :Therefore, Overall Alpha = 0.50 + 2.50 + 1.50 + 2.50/4 = 1.75 Overall Beta = 0.90 + 1.30 +1.40 + 2.10/4 = 1.425

Overall return portfolio = alpha value + beta portfolio * RM = 1.75+1.425*10 = 16

(ii) Portfolio Variance = (Beta portfolio) 2 * Variance market + (weight)2 * RV of Securities = (1.425) 2 * 27 + (0.25) 2 * [45+130+199+53] = 54.83 (approx) + 26.69 = 81.52%

Q4. An investor is considering the purchase of the following Bond: Face value Coupon rate Maturity Rs. 100 11% 3 years

(i) If he wants a yield of 13% what is the maximum price he should be ready to pay for? (ii) If the Bonds is seliing fir Rs. 97.60, what would be his yield?

Solution:(i) If he wants a yield of 13% what is the maximum price he should be ready to pay for are as follows:-

Current price = (Annual interest * Sum of P.V.@ 13% for 3year )+(R.V * P.V) = [11*(0.8849+0.7831+0.6930)]+[100*0.6930] =11*2.361+69.30 =25.971+69.30 = 95.271

(ii)

If the Bonds is selling for Rs. 97.60, what would be his yield are as follows:YTM = [{11 + ( 100 97.6 )/3 } / {(100+97.6)/2}]*100 = [11.8/98.8]*100 = 11.94 or 12 approx.

Using Discount rate = 12% P.V of inflows = 11* 2.4(for 3 years) + 100 * 0.712(for 3rd year) = 26.4 + 71.2 = 97.60

Q5. Sarman Ltd. has issued convertible debentures, with coupon rate 12%. Each debenture has an option to convert to 20 equity shares at any time until date of maturity. Debentures will be redeemed at Rs.100 on maturity of 5 years. An investor generally requires a rate of return of 8% p.a. on a 5 year security. As an investor when will you exercise conversion for given market prices of the equity share of (i) Rs. 4, (ii) Rs. 5 and (iii)Rs. 6

Cumulative PV factor for 8% for 5 years PV factor for 8% for year 5

: 3.993 : 0.681

Solution5: If debentures are not converted its value is as under: Particular Interest-Rs 12 for 5 yrs Redemption-Rs 100 in 5th Year Total PV Factor@ 8% Amount(Rs) 3.993 0.681 47.916 68.100 116.016

Value of equity Shares: Market Price(Rs) 4 5 6 No of Equity Shares Amount (Rs) 20 20 20 80 100 120

So, Conversion cannot be exercised until the market price is 6.