Paper , Order, or Assignment Requirements
Financial Management
Question A
- Distinguish between the different forms of economic efficiency.
(Not less than 200 words)
- Discuss why the concept of financial market efficiency is important.
And what are the key implications of efficient financial markets, for both investors and company managers. (Not less than 800 words)
- Fama, (1970) identifies three different levels of financial market efficiency. Define these different levels of market efficiency and briefly explain the implications of each for stock market investment decision-making.
(Not less than 350 words)
Question B
Sing Hui Mining Corporation is a Singapore-based company that is listed on the Singapore stock exchange. The company has a current market value of S$800m. Its equity beta is currently 0.59. The risk-free return is currently 4% and the average market return on the Singapore Hang Seng index is 9.5%.
Sing Hui Mining specialises in the extraction of rare minerals. The company plans to raise an additional S$200m of finance to undertake the exploitation of two new mineral deposits. One deposit is of the mineral Monazite and the other is a Gadolinite deposit. The S$200m of investment funds will be split equally between the two mining projects.
The returns – as measured by their IRRs – expected from each mining investment differ and are dependent on future world economic growth rates and have been estimated as follows:
| World Economic Growth Rate | Return on Monazite | Return on Gadolinite |
| 7% Growth | 28% | 9% |
| 3.5% Growth | 16% | 10% |
| Zero Growth | 4% | 15% |
The Organization of Economic Co-operation and Development, (OECD), currently estimate that there is a 10% probability of 7% global economic growth; a 70% probability of 3.5% growth; and a 20% probability of a zero rate of world economic growth.
Required:
- Estimate the expected returns and risk, (standard deviation), on each of the two mining investments.
- Estimate the expected return and risk of the portfolio of the two new mining investments. Discuss the significance of your calculations and the cause of the observed effect.
(Not less than 450 words)
- The current standard deviation of return on Sing Hui Mining Corporation shares is 10% and its existing mining activities are expected to have a correlation coefficient of +0.60 with the two new mining developments. Calculate the combined impact of the two new mining developments on Sing Hui’s overall risk, (as measured by its standard deviation).
- Estimate what would be the change in the both the company’s beta value and the required return on equity, if Sing Hui undertakes the two mining operations, given that the standard deviation of returns on the of the Singapore stock market, (the Hang Seng index), is 11% and the company’s correlation coefficient with the Singapore stock market remains unchanged from its current level.
Question C
An investor wishes to invest in a portfolio of corporate bonds and faces a choice of four different bond portfolios, which are characterised as follows:
Portfolio Alpha: High coupon / long maturity.
Portfolio Beta: High coupon / short maturity
Portfolio Gamma: Low coupon / long maturity.
Portfolio Delta: Low coupon / short maturity.
- If the investor believes that market interest rates are likely to rise in the future, recommend, with brief reasons, which might be the most suitable bond portfolio investment. (Not less than 350 words)
- Binna Biotech Berhad and Leon Steel Group Berhad are both listed on the Kuala Lumpur stock exchange. Bina Biotech has bonds in issue with an 8% coupon rate and a M$5,000 par value. The bonds have 4 years until maturity at par and currently yield 6%. Leon Steel Group bonds have a modified Macaulay duration of 3.2%
Which company’s bonds might an investor prefer if it was thought that bond yields were likely to fall in the future? (Not less than 350 words)