Corporate Finance 2

Major Assignment Specifications

(Individual Assignment)
General Information (read this first)

1. Due Date: Midnight of 19th June 2017

2. Marks: 100
3. Weightage: 30%
4. Late submission penalty 2 Marks Per day
5. Safe Assign Match
25% - 50% - penalty of 5 Marks per question
20% - 50 % - penalty of 10 Marks per question
50 % - 75% - penalty of 15 Marks per question
Over 75% - Zero for the assignment
6. This assignment tests your understanding of the

various variables used in corporate finance rather than the calculations itself.

assumptions underlying the variables used in corporate finance.

organisational and management implications of the various variables that are

calculated as a part of CF2.

7. Marks are awarded for four components and the approach used rather than the calculations
itself.

Approach (methodology)

Assumptions (Clearly defined)

Application

Calculation

8. Assignment must be submitted as a Report with a coversheet & appropriate title. All the
excel calculations are to be transferred to your report itself. The summary to be provided in
the report and calculations in the appendix. Only one file (doc or pdf) to be submitted.

9. Executive summary is Not Required

10. Table of Contents is required, Start with Question 1 after TOC

11. Use the section numbering (task number & activity number)

12. You must provide snapshot of information in your report where you have used external
information.

13. Referencing of all the sources used in the assignment is mandatory.

Task 1: Risk & Return (40 Marks)
A. Prepare a portfolio of a minimum 5 securities from any one Market (India -BSE, US - NYSE,
etc.). Discuss the objective of your chosen portfolio.

Select 5 companies

B. Assuming you own certain number (100,500, 1000 etc.) of each share in your portfolio,
calculate the weights of the shares your portfolio.

C. Collect the GDP data of the country related to your market. Define at least three states of
nature and identify the probabilities for the three states of nature. For calculating the
probabilities, you may use at-least 10 years economic data.

To get lower limit of the GDP data = Mean std devia

Upper limit = Mean + Std devia

See what years fall in which category

Then you get your nature of state of economy

Boom, neutral, recession

D. For each state of nature (years in which the state of nature prevailed in your market)
calculate the average expected return for each stock. Summarise and present the
information in a table.

Annul data % change sort take average

E. Calculate the Expected Return and Standard deviation of the portfolio. Discuss the
implications.

F. Calculate beta of each stock using sock return and market return. Here you may have to use
same ten years as above, but need to collect the quarterly, monthly or daily data for market
and the stocks.

Market Return Monthly

Take the market data

= Current previous / previous

Run regression with market return

Y = stock return

X= market return

X variable = beta (coefficients)

Total Beta = Sumproduct of beta and weight

Beta monthly on that stock exchange regression

G. Calculate the beta of the portfolio and discuss its implications in relation to Standard
Deviation of the portfolio
 H. Identify the risk-free rate of return & market return (10 year average) that is appropriate for
your portfolio.

I. Using the Beta of each share compute Expected return of each of the five shares using
CAPM. Compare your answer with the Expected Return of share that you have calculated
earlier using the probability and discuss the implications.

J. Using the Beta of portfolio compute Expected return using CAPM. Compare your answer
with the Expected Return of Portfolio that you have calculated earlier and discuss the
implications.

K. State all the assumptions that you have made in the above calculations.

Task 2: WACC (20 Marks)

A. Pick any one share from your portfolio. Assume that this is your firm.Determine and explain
your approach of calculating the weight of debt and weight of equity.

B. Determine the average cost of equity from the market information using the CAPM.

C. Determine the average cost of equity from the market information using the CDGM.

D. Determine the average cost of equity by taking the average of CAPM and CDGM cost of
equity.

E. Determine the cost of debt from the market information.

F. Determine the weight of debt and equity and Corporate Tax rate prevailing your market.

G. Calculate the WACC for your firm.

Assuming classical tax system

Assuming imputation tax system

H. Using Subjective Approach create and discuss table of WACC that you would use to evaluate
the projects of various risk level.

For WACC (classical tax)

For WACC (imputation tax)

I. If this project has lower risk than your current operations evaluate the project (CFs are
provided in the table below) using any three decision tools. Discuss your results.

J. If this project has same risk level as your organisation, evaluate the project (CFs are provided
in the table below) using any three decision toolsand discuss your result.

K. State all the assumptions that you have made in the above calculations.

Year 0 1 2 3 4 5 6 7 8 9 10
 FCF ($Mn) -876 -30 230 342 238 167 165 142 329 225 188

Task 3: Capital Structure Theory (20 Marks)

A. Choose three years to analyse your firm in such a way that they represent three states of
nature in Q1.

B. Determine the Market Value Debt-to-equity ratio for these years. If needed make
assumption on Market to book ratio for both debt and equity.

C. Calculate the EPS, ROE and OCF of your chosen share for each of the three years.

D. Determine a target Debt-Equity ratio for each of three years (three states of nature) and
discuss the logic behind your choice.

E. Using the Target Debt-Equity ratio (assuming you have restructured your capital Structure)
determine the New EPS, ROE and OCF

F. Determine the percentage variation in EPS, ROE and OCF. Discuss the implications.

G. Determine for each state of nature, the EPS Break-even-EBIT using the original and target
Debt Equity ratio.

H. Discuss how changing the capital structure would affect the value of your firm and WACC in
each of three states of nature.

Task4: WorkingCapital Management Simulation (20 Marks)

A. Choose any one organisation from your portfolio and calculate the working capital of last
five years. Analyse the trends in the working capital and explain the reason behind the
changes. Present the snapshot of the data used for calculations.
B. Calculate the cash cycle for the two most recent years and explain the reason for any
changes in the cash cycle.
C. In your own words, provide a brief description of the simulation.
D. Present your simulation outcomes.
E. Discuss the strategy that you adopted during the simulation.
F. Present a summary of what you have learned from the simulation.

References

http://data.worldbank.org

http://www.reuters.com
https://tradingeconomics.com/thailand/government-bond-yield