The paper "Financial Management: Principles and Practice" is a great example of an assignment on finance and accounting. Under portfolio valuation, the covariance between JAY and KAY is showing that the shares have a negative and weak relationship. Secondly, the expected return and standard deviation of the portfolio are 19.8% and 19.7789% respectively. This shows that diversification lowers the risk. In order to attain a portfolio return of 15.6%, a weight of 70% and 30% will be required for JAY and KAY respectively. The new standard deviation would be 13.26%, which is lower than the initial level of 19.7789%.
A comparison of bonds A, B, and C indicate that their respective market prices are $ 692.02, $ 930.52, and $ 1052.72. Concisely, bonds A and B are selling at a discount while bond C is selling at a premium. By deciding to issue only bond B, Jasmine has to issue 534.76 bonds in order to raise $465,260. On share valuation, the current price of shares in NoChange Ltd, ConstantGrowth Ltd, SteadyGrowth Ltd, SuperGrowth Ltd, and QuickGrowth Ltd are $42.5, $73.67, $70.83, $90.98 and $81.23 respectively. Question 1: Portfolio valuation The covariance between Share JAY and KAY returns The calculated covariance of shows that the returns on JAY and KAY have a tendency to move in opposite directions.
Specifically, returns on JAY will tend to rise as returns on KAY decline. Similarly, returns on KAY will rise as returns on JAY move downwards. It is important to note further that the relationship between JAY and KAY is weak as indicated by the magnitude of covariance. The expected return and standard deviation of returns on the portfolio Expected return Standard deviation Given that the two assets are negatively correlated with a correlation, diversification has the effect of reducing risk (Parrino et al, 2011).
The standard deviation of the portfolio is 19.77% compared with 18% and 32% for JAY and KAY respectively. The required weights of individual assets in order to attain a portfolio return of 15.6% Variance and standard deviation from Question 2: Bond Valuation The market price of each bond Bond A: Zero coupon bond Bond B: Bond C: Bond A and bond B are selling below the par value of $1000. They are therefore classified as discount bonds.
Both bonds A and bond B have coupon rates that are lower than the market rate of return i. e. 7.5% resulting in the bonds selling at discount. A bond that is selling at a premium would have the current yield on the bond is less than the coupon rate (Andrews and Gallagher, 2007). In this case, bond C is selling at a premium given that its coupon rate of 8.4 is higher than the market rate of interest of 7.5. Finally, among the provided bonds, no bond is selling at par value.
Bonds whose coupon rate is the same as the market rate of interest are classified as selling at par value. Number of bonds required to raise if bond B was issued Question 3: Share Valuation Zero growth dividend model Constant growth model Steady growth model Super growth model Dividends during rapid growth Quick growth Recommendations Invest a weight of 70% in JAY and a weight of 30% in KAY in order to reduce risk from the initial standard deviation of 19.7789 to 13.26%. Purchase bonds A and B, which are selling at a discount rate
Andrews, JD & Gallagher, TJ 2007, Financial Management; Principles and Practice, Minnesota, Freeload Press.
Parrino, R, Kidwell, D, Au Yong, H, Morkel-Kingsbury, N, Dempsey, M & Murray, J 2011,
Fundamentals of corporate finance, 1st edn, Wiley, Sydney.