Question 1 Portfolio valuation

Consider shares in two companies, JAY and KAY, as follows:

 Expected Return E(R) Standard Deviation Correlation Coefficient Share JAY 12% 18% – 0.3 Share KAY 24% 32%

a) Calculate the covariance between Share JAY and KAY returns.

b) What is the expected return and standard deviation of returns on a portfolio comprising 35% in Share JAY and 65% in Share KAY?

c) If you wanted to create a portfolio consisting only of these two shares, how much would you need to invest (weights) in each share so that your portfolio return would be equal to 15.6%? Note: do not round.

d) Using the weights calculated in part c), calculate the variance and standard deviation of your portfolio.

Question 2 Bond valuation

Jasmine Ltd is considering issuing bonds to raise funds for a new project. The following three options are being considered.

 Bond Coupon Rate Coupon/Compounding Frequency Yield Term in years Face Value A 0.00% half-yearly 7.50% 5 \$1,000 B 6.50% half-yearly 7.50% 10 \$1,000 C 8.40% Yearly 7.50% 8 \$1,000

a) Calculate the market price of each bond.

b) Classify each bond as either selling at a premium, par or discount.

c) Assume Jasmine has decided to issue only B Bonds. If Jasmine Ltd needs to raise \$465,260 how many bonds would need to be issued?

Question 3- Share valuation

Calculate the current market price of each of the following shares assuming a discount rate of 10%.

a) NoChange Ltd is a company with no growth potential. Its last dividend was \$4.25, and it expects no change in future dividends.

b) ConstantGrowth Ltd just paid a dividend of \$4.25 and it expects its dividend to grow steadily at 4% per year.

c) SteadyGrowth Ltd plans to pay a dividend of \$4.25 next year. It expects its dividend to grow steadily at 4% per year.

d) SuperGrowth Ltd just paid a dividend of \$4.25 and it expects its dividend to grow quickly at 12% per year for the next three years. It then expects the growth rate to remain constant at 4% per year.

e) QuickGrowth Ltd plans to pay a dividend of \$4.25 next year. It expects its dividend to grow quickly at 12% per year for the next three years. It then expects the growth rate to remain constant at 4% per year.

Conclusion

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