FINANCE ASSIGNMENT

Finance Assignment



Finance Assignment

Question A-1

A) Required rate of return

The required rate of return on investment is the rate of return that an investor has to compensate the risk from these investments. The following calculation is of Foxwedge Mining. Formula ki = kRF + (kM - kRF) bi.

Where ki = required rate of return,

kRF = risk-free rate

kM = expected rate of return of market Foxwedge Mining

ki = kRF + (kM - kRF) bi

ki = 0.04 + (0.1 - 0.04) 1.2

ki = 11.2%

Sirpinz Holdings

ki = kRF + (kM - kRF) bi

ki = 0.04 + (0.1 - 0.04) 0.8

ki = 8.8%

Galilee Trading

ki = kRF + (kM - kRF) bi

ki = 0.04 + (0.1 - 0.04) 2.0

ki = 16%

B) Process of accessing a beta value

Beta is the measure of the instability of the risk. When beta is not given in the data, then it is calculated using regression analysis. If it is 1 then it indicates, then the company can face the risk of the market. If it is less than 1, then the company is more unstable from the risk. If the company indicates a beta above 1, this means that the company is more stable against risks than the company. The formula to calculate beta is as follows:

Where ß = beta coefficient

x= benchmark return, and

y= portfolio return.

C) Investment Recommendation

Required rate of return is the minimum return the investor or the company expects from investing. The required rate of return calculated for the above three companies depicted a different picture. For first two companies, i.e. Foxwedge Mining and Sirpinz Holdings; have both shares same rate of expected return which is 11.5%. After the calculations the required rate of return results in 11.2% and 8.8% respectively. This means that these two companies cannot manage and face the risk. Investment in these companies would be fruitless. Although, Foxwedge Mining's required rate of return is more than the market's expected rate of return; still it is not a feasible choice. This is because, the third company Galilee Trading has required rate of return 16%. This rate of return is much more than the market expected rate. Therefore, investment in Galilee Trading would turn more profitable and beneficial for the investors.

D) i) Portfolio Required Rate Of Return

Rate of return (and performance expressed in percentages) is a weighted rate of return over time and based on the valuation of the portfolio each time a movement of funds takes place. First of all the weights would be required to calculate the portfolio returns. The weights of each company would be calculated by dividing the investment by the portfolio investment.

After the calculation of weights separately, portfolio required rate of return would be calculated as follows: R = portror(Return, Weight)

Where R is portfolio required rate of return. Keeping in mind all three companies the formula would be:

R = expected ror (w1) + expected ror (w2) + expected ror(w3)

R = 11.5 (0.5) + 11.5 (0.4) + 12.5 (0.097) R = ...