Reference no: EM132353968

Corporate Finance Assignment - Statistical Group Report

Purpose and Learning Outcomes -

The purpose of this assignment is to: Demonstrate your ability to work with other team members in measuring returns, risk assessment and analysis. This will be presented in the form of statistical report.

The Learning Outcomes assessed are:

1: Systematically analyse the financial press and interpret the information in relation to Australian and global financial institutions;

2: Collaboratively, synthesise the theoretical and practical developments in finance in our dynamic, global context;

3: Decode and interpret Corporate Finance concepts and make financial decisions based on the financial results ;

4: Adapt the application of specific techniques of analysis in solving Corporate Finance problems; and

5: Investigate the impact of alternative financing proposals that a firm may face in the long term and present recommendations.

Background Information -

This assessment task requires your team to develop a written presentation based on information that your lecturer has collected for this assignment. The information is considered rather rudimentary, but the difficulty of the task is in the analysis and clarity of your explanations of the results.

Each team is required to review the information provided and break it down into its simplest components and figure out a way to show how risk is treated in the financial markets and when making investment decisions. The presentation should be as complex as the team feels is necessary.

There are two ways to understand risk: risk could be measured in conjunction with an investor's portfolio, or risk could be measured as the potential for variation of returns from a single investment. It is stressed that each team should work out these two different meanings of risk in the presentation and make sense of each. In addition, it is concerned that the techniques used in finance are complicated and tedious, and this presentation allows you to discuss and demonstrate how these techniques can actually make sense when considered carefully.

The Numbers -

You are provided several sets of numbers for the team to use in the presentation (Exhibit 1). The first set is 25 observations of historical monthly share prices for two different stocks and the historical monthly share market index over the same period. These representative numbers have been extracted from the Internet. It also indicates to each team that the proper measure of risk for a portfolio would have to be calculated using this kind of data series.

Exhibit 1 - Monthly Values for the Market Index and the Two Traded Shares.

Report -

Your team is also required to produce an approximately 700 word report that comments on the results calculated above. The report will need to refer to each statistic calculated and interpret (not simply summarise your results) the result and make comparisons amongst the market index and the two companies. Your team is required to specifically address what each statistic is actually measuring and its implications from a risk and return viewpoint. You will also need to focus on the impact of creating a portfolio of two shares and the implications for risk reduction (You will need to provide some quantitative evidence of risk reduction). Furthermore, the Beta of each company needs to assessed and interpreted in the context of asset pricing. That is, what is the implication for risk and required return and what impact will this have on the asset's price?

Questions -

Each team is instructed to specifically address all of the following questions within your report:

1. Using the information given in Exhibit 1, calculate the historical returns for each company and the market index. With the use of the excel functions calculate the average monthly return and standard deviation of returns for each company and the market index.

2. Using your answers to Question 1, above, and assuming that investors can only invest in one of the two alternative shares in Exhibit 1, use the average return and standard deviation to determine which share would be the most appropriate for a risk-averse investor. Provide numerical justification for your selection based on the coefficient of variation.

3. Calculate the correlation coefficients between all shares. Provide an explanation of your results and the implications for diversification.

4. Determine the expected return and standard deviation of a two-asset portfolios comprised of Gladiator Ltd and Spartan Ltd; Assume equal weightings of each share within the portfolio. Interpret your results and comment and illustrate the impact on risk when combining shares into a portfolio. You need to quantify the level of risk reduction in this case.

5. Determine the systematic risk (Beta) for both shares. Interpret your answers. What is the implication for asset pricing given the beta of each share? The use of excel functions should be used to calculate Beta (use the slope function).

6. Assuming a risk-free rate of 3% and market risk premium of 7%, calculate the required return for both shares. Furthermore, calculate the Present Value of each company assuming that the dividend for Gladiator has grown from $0.80 to $0.92 in the last 5 years and the dividend got Spartan has increased for $1.20 to $1.36 in the last 5 years.

Requirements for the Assignment -

• Excel Statistical functions can and should be used to complete statistical calculations.
• Your answers should be clearly addressed within the report, with any further supporting calculations referenced to an appendix.
• The standard of your presentation will be assessed and marked.
• Evidence of your team's breadth and depth of research will be assessed.
• We expect that you will provide explanations as to how you established each answer. All detail relating to your answers needs to be shown within the assignment. This may include explanation of procedures undertaken, assumptions made and the choice of a formula to solve a problem. We require detailed explanations.
• You need to reference (Harvard). Marks will be deducted from assignments that fail to reference
• There is an expectation that each team will work collectively rather than independently when completing this assignment. As members of a team you are all jointly responsible for the contents of your assignment.
• Clear presentation/calculation of performance data
• Sound analysis based on calculations
• Risks Identification
• Teamwork.

Attachment:- Statistical Report Assignment Files.rar