FIN303: you are asked to Apply what you Know of the Three (3)  Basic Decisions of Financial Management: Financial Management Homework, SUSS, Singapore

Question 1:

To answer this question set,  you are asked to apply what you know of the three (3)  basic decisions of financial management to different kinds of business in the COVID-19 context. Your answer should be less than 250 words for each sub-question – (a), (b), and (c).

(a)Indicate and analyze how the  COVID-19  situation can affect capital budgeting decisions in an oil and gas company.(9 marks)

(b)Indicate and analyze how the COVID-19 situation can affect financing decisions in an international hotel chain business. (8 marks)

(c)Indicate and analyze how the   COVID-19   situation can affect working capital management decisions in a fashion retail outlet company.(8 marks)

Question 2

After a few years, your team’s business has thrived. You are approached by the private banker of a renowned institution to invest your hard-earned cash in securities.

The first investment proposal is a  single stock for a  company called  Atlas.  Atlas has  the following historical price quotes and dividend payments.

The second investment proposal is a combination of three stocks in a portfolio called Philemon. To inform your decision, the private banker indicated the expected rate of return for each of the stock, given two different economic situations. The proposal is to invest 25 percent each in stock A and C, and 50 percent in stock B.

The third investment proposal is a bond issued by Demeter Corp.. The private banker has laid down a base scenario to help you determine the total real return on this investment. You will buy the bond today for a clean price of $1,035.00. The bond makes annual coupon payments of 6.5 percent and mature in 10 years. You will sell the bond in one year from now when the required return on the bonds will be forecast to be 6.2%. Assume the inflation rate over this coming year is 2.5%.

(a)Determine the arithmetic and geometric returns for the Atlas stock.

(b)Compute the expected return for the Philemon portfolio of three (3) stocks.

(c)Compute the variance and the standard deviation for the portfolio

(d)Compute the expected return and the standard deviation if the portfolio is invested 60 percent in stock B and 20 percent each in stock A and C. Discuss the change.

(e)Calculate what would be your total real return on investment for the  Demeter  Corp. bond.

Question 3

Your business has expanded and your team is looking for new funds. To secure your valuation, a prospective investor requires you to indicate a cost of equity and a weighted average cost of capital.

For this purpose, you have gathered the following information:
•Your industry comparable stock beta is 1.28
•Your company is currently valued at $97 per share
•Your business has just paid a dividend of $1.10
•The dividends are expected to grow by +3.00% a year over an indefinite future
•The expected return on the market is 8.50% for a risk-free rate of 1.50%

Your prospective investor has also shared some information on his own company:

• Tax rate: 17.00%
• Common stock:
  o2,000 shares currently valued at $74.00 per share
  oHis industry comparable stock beta is 0.90
  oHis business just paid a dividend of $3.15
  oThe dividend is expected to grow by +2.00% per year indefinitely
• Debt:
  o110 bonds outstanding  with  13  years  to  maturity,  4.7  percent  coupon  and  a  market price of $1,070. The bonds pay interest semi-annually.

(a)Determine the cost of equity using the dividend growth model (DDM) method. (3 marks)

(b)Determine the cost of equity using the Capital Asset Pricing Model (CAPM) method.(5 marks)

(c)Explain the reason(s) for the difference in your estimates under (a) and (b).(3 marks)

(d)Estimate the weight to use for debt when calculating the cost of capital of your prospective investor.  (6 marks)

(e)Determine a WACC estimate for your prospective investor using CAPM.(8 marks)