MBA- Financial Management
Time Value of Money and Risk/Return
Learning Objectives for Course
Obtain a comprehensive understanding of the financial environment and adequately define financial terms
Have an ability and readiness to formulate, examine and defend business case judgments, as well as recognize ethical dilemmas and corporate social responsibility issues in Finance,
Conceptually understand the main theories of Corporate Finance and have a commitment to their practical mathematical application
Compare and appraise theories that underlie current thinking in Corporate Finance and Investment, demonstrate and evaluate how these theories can be applied in practical situations,
Demonstrate effective oral communication of complex ideas and arguments, possess developed listening skills.
Guidelines for assignment
This is an individual assignment
Ground your answer in relevant theory
Plagiarism and reproduction of someone else’s work as your own will be penalized
Make use of references, where appropriate – Use Harvard or APA referencing method.
Late submission implies a deduction of 10 marks per day
Structural elements should include an introduction, main body, and a conclusion
Weight – 40%
Word count guidance: 2500 words
Type of assignment: Excel Assessed Work Folder
Start / Finish : Week 3 – 4
Learning Outcome Assessed: 1,2,3,4
Time Value of Money
Attempt the following questions within an Excel WorkFolder. There is a template provided within the assignment folder.
You have €12 000 in cash. You can deposit it today in a mutual fund earning 8.2 per cent semi-annually, or you can wait, enjoy some of it, and invest €11 000 in your brother’s business in two years. Your brother is promising you a return of at least 10 per cent on your investment. Whichever alternative you choose, you will need to cash in at the end of 10 years. Assume your brother is trustworthy and both investments carry the same risk.
You are graduating in two years, and you start thinking about your future. You know that you will want to buy a house five years after you graduate and that you will want to put down €60 000. As of right now, you have €8000 in your savings account. You are also fairly certain that once you graduate, you can work in the family business and earn €32 000 a year, with a 5 per cent raise every year. You plan to live with your parents for the first two years after graduation, which will enable you to minimise your expenses and put away €10 000 each year. The next three years, you will have to live on your own as your younger sister will be graduating from college and has already announced her plan to move back into the family house. Thus, you will be able to save only 13 per cent of your annual salary. Assume that you will be able to invest savings from your salary at 7.2 per cent.
Gunter Koch, a top-five draft pick of FC Bayern Munich, and his agent are evaluating three contract options. Each option offers a signing bonus and a series of payments over the life of the contract. Koch uses a 10.25 per cent rate of return to evaluate the contracts.
Surmec, AG reported earnings (sales or net income) of €2.1 million last year. The company’s primary business line is manufacturing of nuts and bolts. Since this is a mature industry, the analysts are certain that the sales will grow at a steady rate of 7 per cent a year for as far as they can tell. The company reports net income that represents 23 per cent of sales. The management would like to buy a new fleet of trucks but can only do so once the profit reaches €620 000 a year.
Risk and Return
Chose 6 out of the 10 questions below to answer.
Given that you know the risk as well as the expected return for two shares, discuss what process you might utilise to determine which of the two shares the better buy is. You may assume that the two shares will be the only assets held in your portfolio.
What is the difference between the expected rate of return and the required rate of return? What does it mean if they are different for a particular asset at a particular point in time?
Suppose that the standard deviation of the returns on the shares of two different companies is exactly the same. Does this mean that the required rate of return will be the same for these two shares? How might the required rate of return on the shares of a third company be greater than the required rates of return on the shares of the first two companies even if the standard deviation of the returns of the third company’s shares is lower?
The correlation between Share A and B is 0.50, while the correlation between Share A and C is −0.5. You already own Share A and are thinking of buying either Share B or Share C. If you want your portfolio to have the lowest possible risk, would you buy Share B or C? Would you expect the share you choose to affect the return that you earn on your portfolio?
The idea that we can know the return on a security for each possible outcome is overly simplistic. However, even though we cannot possibly predict all possible outcomes, this fact has little bearing on the risk‐free return. Explain why.
Which investment category has shown the greatest degree of risk in the United Kingdom since 1900? Explain why that makes sense in a world where the price of equities is likely to be more adversely affected by a particular negative event than the price of a bond. Use the same type of explanation to help explain other investment choices since 1900.
You are concerned about one of the investments in your fully diversified portfolio. You just have an uneasy feeling about the CFO,I.M. Shifty, of that particular firm. You do believe, however, that the firm makes a good product and that it is appropriately priced by the market. Should you be concerned about the effect on your portfolio if Shifty embezzles a portion of the firm’s cash?
The CAPM is used to price the risk in any asset. Our examples have focused on shares, but we could also price the expected rate of return for bonds. Explain how debt securities are also subject to systematic risk.
In recent years, investors have correctly agreed that the market portfolio consists of more than just a group of shares and bonds. If you are an investor who invests only in shares, describe the effects on the risk in your portfolio.
You may have heard the statement that you should not include your home as an asset in your investment portfolio. Assume that your house will comprise up to 75% of your assets in the early part of your investment life. Evaluate the implications of omitting it from your portfolio when calculating the risk of your overall investment portfolio.
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