and dividend information for both companies and the share market index. Required: You will be

Business Finance BAO5534 Assignment Semester 2 2014 Introduction The focus of this assignment is on risk, return and equity analysis. The expectation is that students will develop skills in measuring returns, risk assessment and analysis and valuation. Students are required to use the data provided in the tables and exhibits to answer a series of questions. Assignment Components The exhibits contain financial information on Bell Ltd and Coffee bean Ltd. It also contains return information and dividend information for both companies and the share market index. Required: You will be required to complete this assignment in teams of three. It is important that you form your teams as soon as possible. I can make announcements prior to the lecture to alert other students without a team to meet after the class. Team members do not need to be in the same tutorial. Please note that under NO circumstances will we allow assignments to be submitted by individuals (This is a group assignment). Note that marks will be deducted for poor presentation. Assignments should be stapled in the top left hand corner. Please do not submit assignments in folders. It is also a requirement that all assignments be submitted with a cover sheet. This cover sheet is now specific to this subject and a copy will be provided on WebCT. Assignments will not be accepted or marked if they are lodged without this cover sheet. The assignment requires each team to undertake independent work. No further assistance will be provided to teams in completing the assignment. The assignment accounts for 15% of the subject’s assessment. Assignment Presentation  Students are expected to complete the calculations to the questions in the assignment. This will require the development of a spreadsheet and the creation of formulas. The excel specialist functions cannot be used to calculate any answers. You are required to develop your own formulas, within the spreadsheet, to complete all the necessary calculations. The answers to your questions can be presented on a word document with the supporting excel spreadsheet calculations clearly referenced in an appendix.  Do not submit your assignment in folders.  NOTE: Your answers should be clearly labeled on an answer sheet(s) by reference to the question number, with any further supporting calculations referenced to an appendix. PLEASE ensure that you reference all material that you have used to answer your questions. This also includes the use of footnotes where appropriate. Penalties will apply if you fail to appropriately reference your assignment answers. Assignment Submission The assignment must be submitted with a signed assignment cover sheet to the lecturer on or before 8 October 2014. Please note that this is a fixed deadline for submission. Extensions will only be granted for exceptional circumstances. Exhibit 1: Monthly Values for the Market Index and Two Traded Shares. Month Market index (points) Bell Ltd ($) Coffee Bean Ltd ($) Treasury Bills – Annualised rates of Return (%) May 2012 1090.82 points $20.60 $24.00 June 1133.84 23.20 26.72 5.70 July 1120.67 27.15 20.94 5.68 August 957.28 25.00 15.78 5.54 September 1017.01 32.88 18.09 5.20 October 1098.67 32.75 21.69 5.01 November 1163.63 30.41 23.06 5.25 December 1229.23 36.59 28.06 5.06 January 2013 1279.64 50.00 26.03 5.16 February 1283.33 40.06 26.44 5.37 March 1286.37 40.88 28.06 5.58 April 1335.18 41.19 36.94 5.55 May 1301.84 34.44 36.88 5.81 June 1372.71 37.00 37.56 6.04 July 1328.72 40.88 23.25 5.98 August 1320.41 48.81 22.88 6.07 September 1282.71 41.81 24.78 6.07 October 1362.93 40.13 27.19 6.26 November 1388.91 43.00 26.56 6.15 December 1469.25 51.00 24.25 6.35 January 2014 1394.46 38.44 32.00 6.63 February 1366.42 40.81 35.13 6.23 March 1498.58 53.94 44.81 6.05 April 1452.43 50.13 30.23 5.85 May 1420.60 43.13 34.00 6.15 Exhibit 2 Dividend story: Annual dividends paid for the last 6 years. Bell Ltd Coffee Bean Ltd $1.10 $2.20 $1.15 $2.30 $1.20 $2.45 $1.25 $2.60 $1.30 $2.70 $1.35 $2.75 Questions Your team has been instructed to answer all of the following questions: 1. Calculate the average monthly holding-period return and standard deviation of these returns for the Market index, Bell Ltd and Coffee Bean Ltd. Use an arithmetic average and the data provided in exhibit 1. 2. Explain what is meant by a share price index and what does it measure? 3. Determine the expected return and standard deviation of a two asset portfolio comprised of Bell Ltd and Coffee Bean Ltd shares. Assume equal weightings of each share within the portfolio. What happens to total risk when you combine shares into a portfolio? Explain using the data in your answers to illustrate numerically how total risk changes once the portfolio is constructed. 4. What factors determine the standard deviation of the portfolio? 5. Use the numbers in Exhibit 1 to determine the systematic risk (Beta) of Bell Ltd and Coffee Bean Ltd. What are the implications for each stock 6. Which measure, beta or standard deviation, is more useful when analyzing stocks that are placed in a diversified portfolio? Provide a detailed response to support your answer (100-150 words). 7. Use the capital asset pricing model to calculate the required rate of return for both Bell Ltd and Coffee Bean Ltd. Use the Treasury bill data in exhibit 1 to determine an annual average for the risk-free rate of return. 8. What is meant by the investor’s required rate of return? 9. What are some criticisms of the capital asset pricing model (100-150 words). 10.Utilising the required rates of return calculated in question 7 above and the historical dividend information in exhibit 2, calculate the intrinsic value for both Bell Ltd and Coffee Bean Ltd. (nt: It is reasonable to assume constant growth in future dividends). Use an annual compounded average rate of return when calculating the historical growth rate in dividends. List any assumptions you have made in your calculations.