SCHULICH SCHOOL OF BUSINESS
Individual Assignment FINE2000 Fall 2020- All Sections
Due: 7 p.m. Sunday, November 8, 2020
INSTRUCTIONS:
- This assignment is an open-book assignment and has six pages and five questions.
- You are asked to submit your file with your questions and solutions to Canvas. Be sure that the file you submit has been saved and is the latest updated version. Your submitted assignment will be checked on Turnitin for originality.Your submitted file must be a MS Word document (.doc or .docx). Any spreadsheets or graphs from other applications should be copied and pasted into your word file. No other file types will be accepted and only one file will be permitted. The file name should include your name and student number.
- You are only permitted to submit one version of your assignment.Multiple submissions are not permitted
- Make any necessary assumptions and state any assumptions in your answer.
- Show all your work. Marks are assigned for the process of the answer the question as well as the correct answer.
Academic Integrity – Student Honor Statement
By submitting this assignment for marking, you accept and agree to the following.
- As a member of this class and of York University, I commit myself to the values and practices as spelled out by Schulich School of Business’s and York University’s Policy of Academic Honesty.
- I understand that I have a responsibility to maintain these values, and in order to do so, I will not engage in any form of cheating or other breaches in academic honestyas defined by Schulich School of Business’s and York University’s Policy of Academic Honesty.
- Specifically, I promise to complete my assignment individually without help from others(e.g., other students, tutors). Engaging the help of others, including collaborating to answer questions together, is not permitted and constitutes academic dishonesty (i.e., cheating). Students who engage in academic dishonesty will be subject to disciplinary action under University policy.
Question 1: Fleury Security Limited (FSL) is projected to have earnings per share (EPS) of $3.50 next year, and the firm’s dividends are 30% of earnings. Investors have a required return on FSL shares of 12.4%. The company has a profit margin of 10%, total asset turnover of 0.9, and total debt ratio of 0.4.
- (5 marks) Calculate the ROE of the company.
- (5 marks) Calculate the price of FSL shares.
- (5 marks) How much of that price is due to future growth opportunities
- Question 2: The current term structure is shown here:
- (7 marks) Calculate the current price of a government bond with a face value of $1000 and a coupon rate of 7%. It is an annual coupon bond that matures in 3 years.
- (13 marks) Calculate the current price of a bond issued by XYZ corporation if it has a face value of $1000 and a coupon rate of 7%. It matures in 3 years. Use the following table to find the default risk premium. (Assume the default risk is not a function of maturity)
| Bond | Rating | Required rate of interest |
| XYZ Co.
7% 3 years from now |
AA | ? |
| ABC Co.
8% 3 years from now |
B | 8.5% |
| NP Co.
10% 5 years from now |
AA | 7.2% |
| XT Co.
3% 5 years from now |
AA | 7.7% |
| BB Co.
10% 3 years from now |
A | 6.85% |
Question 3: Wild Corporation is in the process of acquiring Tamed Inc. Tamed Inc. has two divisions: food manufacturing and retail grocery. The current number of outstanding shares is 200.
- (8 marks) What do you recommend for the total value of the food division? What about the retail grocery division?
- (7 marks) The management of Tamed Inc. has informed us that the Cost of goods sold for the Retail Grocery division was abnormally high this year due to the temporary closure of one of the local suppliers. We expect a much lower Cost of goods sold for that division in the future. Given this information, what do you recommend for the total value of the food division? What about the retail grocery division?
- (3 marks) Wild Corporation is offering $92 per share. Given the information in part (b), would you recommend the shareholders of Tamed Inc. to accept the offer or decline it? Why?
| Statement of Comp. Income (Food Manufacturing Division) | |
| Sales | 2,000 |
| Cost of goods sold | 700 |
| Depreciation | 300 |
| EBIT | 1,000 |
| Interest paid | 200 |
| Taxable income | 800 |
| Taxes (40%) | 320 |
| Net Income | 480 |
| Statement of Comp. Income (Retail Grocery Division) | |
| Sales | 2,500 |
| Cost of goods sold | 1,400 |
| Depreciation | 500 |
| EBIT | 600 |
| Interest paid | 100 |
| Taxable income | 500 |
| Taxes (40%) | 200 |
| Net Income | 300 |
| Statement of Comp. Income (Consolidated Statement) | |
| Sales | 4,500 |
| Cost of goods sold | 2100 |
| Depreciation | 800 |
| EBIT | 1,600 |
| Interest paid | 300 |
| Taxable income | 1,300 |
| Taxes (40%) | 520 |
| Net Income | 780 |
| Companies similar to Tamed Inc. | Industry | Price-to-earnings ratio
|
Price/Sales ratio |
| CA. Shop Co. | Grocery | 14 | 3 |
| Sunny Co. | Grocery | 15 | 3.5 |
| Raspberry Co. | Food | 18.5 | 5 |
| Pasta Inc. | Food | 18 | 4.5 |
| ShopWithUS Co. | Grocery | 14.5 | 4 |
| PeachPerfect Inc. | Food | 19 | 6 |
Question 4: There are three stocks in the market, stock A, stock B, and stock C. The price of stock A today is $75. The price of stock A next year will be $63 if the economy is in a recession, $83 if the economy is normal, and $95 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.20, 0.65, and 0.15, respectively. Stock A pays no dividends and has a beta of 0.64. Stock B has an expected return of 6%, a standard deviation of 30%, a beta of 0.42, and a correlation with stock A of 0.52. Stock C has an expected return of 4.739%, a standard deviation of 23%, a beta of 0.26, and correlations with stock A of 0.42 and with stock B of 0.46. Assume the CAPM holds.
- (6 marks) Calculate the expected return and standard deviation of stock A.
- (2 marks) If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer?
- (6 marks) Calculate the expected return and standard deviation of a portfolio consisting of 45% of stock A, 30% of stock B, and 25% of stock C.
- (6 marks) Calculate the beta of the portfolio in (c).
Question 5: Exploring and Understanding Market Efficiency-Find a recent quarterly or annual announcement by a North-American, publicly-traded company and then summarize and analyze the market’s reaction to that announcement. You can use any of the following sources for your news article; National Post, Globe and Mail, Wall Street Journal, Bloomberg News, Reuters, New York Times, Financial Times, or Forbes. The timing of the announcement must be between September 1, 2020 and November 4, 2020. You cannot analyze an event that was discussed in class.
- (7 marks) Briefly explain the company’s main business and summarize the content of the news announcement You should include a copy of the article. Be sure to reference your article.
- (8 marks) Describe how the market reacted to the announcement. Include a graph showing the impact of the announcement on the company’s stock price. Was the news expected? Unexpected? Was the market’s reaction complete and immediate? Was there over-reaction by the market? What else was happening on the markets at the time of announcement?
- (7 marks) Explain in your own words why the market may have reacted in the manner it did.
- (5 marks) In your opinion, does your example support strong, semi-strong, or weak efficiency of markets.
Your response should not exceed 500 words. You will be judged on the selection of your article, and the completeness and clarity of your description, analysis, and commentary. Grammar, spelling, format, sourcing of references etc. will also be considered.
