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SUGGESTED SOLUTION
Question 1
(√6 x ½ = 3 marks)
ii. 2-Stock Portfolios Standard Deviation
√ √ √ √
[Camelia, Tulip] ( 0.52 ) ( 0.22 ) + ( 0.5 2) ( 0.32 )+ ( 2 )( 0.5 )( 0.5 ) ( 0.6 ) ( 0.2 ) ( 0.3 )
√
√ 0.01+0.0225+0.018
√ 0.0505 = 22.47%
(√4 x ½ = 2 marks)
Choose portfolio C,T and T,S because the required returns are lower than the
expected return. √√
(√10 x ½ = 5 marks)
iv. A positive relationship between the two securities increases the standard
deviation of the entire portfolio. √ While, a negative relationship between the two
securities decreases the standard deviation of the entire portfolio. √
(√2 x 1 = 2 marks)
v. In a large and diversified portfolio not all of the risk can be diversified away. As
the number of securities become large, the only risk which is still left is the
systematic risk √ and there is no unsystematic risk. The unsystematic risk is now
equal to zero and become irrelevant. √ In order to measure risk of large and
diversified portfolio, investors are interested in contribution of an individual
security to the variance of the portfolio. √ Therefore, beta is the best measure of
risk of a security in a diversified portfolio.√ This is because beta measures the
responsiveness of the security’s return to movement in the market. √
(√5 x 1 = 5 marks)
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MAF603 – JUNE 2017
vi. A zero beta indicates that the security does not have any correlation with the
market√. A zero standard deviation indicates a security or a portfolio has zero
risk√. Therefore, a zero beta is not the same as a zero standard deviation√.
(√3 x 1 = 3 marks)
(Total: 20 marks)
Question 2
(√2 x 1 = 2 marks)
B. i. The situation given indicate that the stock selection based on past stock price
movements. √ Thus, this implies that a stock’s price movement in the past is
related to its price movement in the future. In semi strong form market efficient
the prices already reflects all past information. √ Therefore, there is no
opportunity to make abnormal returns. √
ii. As the broker has revealed that information that is not generally available yet to
the public, therefore you have information that no one else has (inside
information) √. As the semi strong form market of the efficient market hypotheses
holds, you should be able to get abnormal profit by trading on this information. √
This is because in semi strong form market efficient the prices only reflects all
past and public information but not the inside information. √
(√6 x ½ = 3 marks)
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MAF603 – JUNE 2017
D.
i. SGD1 = 0.73468USD √√
SGD1.36114
(√2 x ½ = 1 marks)
ii.
£
a. Revenue from re-sale of goods 300,000 √
Less: Cost of 500,000AUD in sterling 285,513.61 √√
Expected profit √ 14,486.39_
Working:
Cost = 500,000AUD = £285,513.61
1.75123AUD
£
b. Revenue from re-sale of goods 300,000 √
Less: Cost of 500,000AUD in sterling _325,807.19 √√
Actual loss √ (25,807.19)_
Working:
Cost = 500,000AUD = £325,807.19
1.53465AUD
(√8 x ½ = 4 marks)
1. Differential in inflation
A country with a lower inflation rate will cause a rise in currency value as its
purchasing power increases relative to other countries.
Higher interest rates will cause a rise in currency value as higher interest offers
lender a higher return relative to other countries.
Where the balance of trade between a country and its trading partners indicate that
imports are greater than exports. This will cause a country to borrow capital from
foreign sources to cover the deficit. Thus, this will result in a depreciation of the
currency in relation to its trading partner.
(Any√2 x 1 = 2 marks)
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MAF603 – JUNE 2017
1. A spot trade √
An agreement to exchange currency on the spot and the transaction will be completed
within two business days. The exchange rate is called spot exchange rate. √√
2. A forward trade √
An agreement today to exchange currency at some time in the future which the
transaction will normally be settled in the next 12 months. The exchange rate is called
forward exchange rate. √√
(√6 x ½ = 3 marks)
(Total: 20 marks)
Question 3
i. B = nil √
S = 12.5 shares x RM10 per share = RM125 m √√
(√2 x 1 = 2 marks)
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MAF603 – JUNE 2017
iv. When the firm include debt in its capital structure in order to finance the project, the
market value of Suprima Bhd increases because the firm can obtain the tax benefit or
tax shield from debt. √
The return on equity will increase √ because the debt issuance will increase the
financial risk of the firm, hence the stockholders will demand for a higher return for
their investment in order to compensate the risk, √ whereas the overall cost of capital
of the levered firm will be reduced due to the tax benefit or tax shield√.
Hence the firm should include debt in its capital structure. √
(√5 x 1 = 5 marks)
(Total: 20 marks)
Question 4
A.
i. NPV (Base Case)
= - IO + PV Depreciation Tax shield + PV (after tax) cash flow + PV Salvage value
NPV (FC)
= -FC + PV FC tax shield
NPV (Loan)
=Gross proceed – PV (after tax) interest – PV (principal)
Decision: Do not undertake the project with debt financing √ because the APV is
negative. √
(√20 x ½ = 10 marks)
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MAF603 – JUNE 2017
Decision: Do not√ undertake the project with Govt. financing because the APV is
also negative √
(√10 x ½ = 5 marks)
Question 5
A.
i. VAB = RM130 m
= RM50 m
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MAF603 – JUNE 2017
ii. FALSE.√
It is because in stock option, the original shareholders of acquiring company will lose
its shareholdings in a merged company. √√Therefore they only bear losses according
to their shareholdings instead of total losses.√√
(√10 x ½ = 5 marks)
C. Some tactics that can be taken by companies to discourage others from trying to
acquire them are: (Any 2)
• Corporate charter amendments like super-majority amendments or staggering
the election of board members
• Standstill agreements
• Exclusionary self-tenders
• Going private and leveraged buyouts
• Other devices like golden parachutes
• Poison pills
(Heading = 2 x ½ = 1 mark)
(Explanation = Any 2 x 2 = 4 marks)
(Total: 20 marks)
END OF SOLUTION