Faculty of Agribusiness and Commerce
FINC 616 Investment Management
Semester 1, 2024
Assignment #1
(Due Date: 4:00 pm on Thursday, 21 March 2024)
INSTRUCTIONS:
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This is an individual assessment.
This assignment consists of FOUR (4) questions.
You are required to answer ALL questions.
Marks allocated to each question are indicated.
Please do NOT share your answers to the questions with others.
The assignment contributes to a maximum of 15% of the final grade.
Please present all final answers with two decimals for number (e.g. 1.23) and two
decimals for per cent (e.g. 1.23%).
FULL working must be presented (with formulas, working steps, and results).
You are welcome to use a financial calculator and/or Excel to do some of the questions.
All tables, figures, and screenshots (if any) should be neatly presented with clear headings.
Please place All Tables and Figures next to the corresponding discussions.
Make sure that all final answers are clearly indicated and easy to identify for marking.
Do NOT copy the questions to your assignment.
There is NO requirement to submit a separate assessment coversheet.
An electronic copy of your assignment file (saved as a .PDF) is to be submitted to the
Submission Drop-Box for Assignment 1 on the course LEARN page (the link opens on Thursday,
14 March 2024). Your name and student ID must be provided on the front page.
Please note that:
 Handwritten answers will NOT be marked.
 Every piece of work you hand in must meet the academic standards of Lincoln University.
You should familiarise yourself with these, including the Academic Integrity Policy.
 Citations and references should be done as per the APA 7th process.
Late Submission:
Unless alternative arrangements have been made with the Examiner, for assessment
worth 10% or more of the final grade, MINIMUM penalties for lateness (based on
calendar days) will be:
Less than 24 hours late (i.e., 1 day)
10% late penalty
Between 24 and 48 hours late (i.e., 2 days)
20% late penalty
Between 48 and 72 hours late (i.e., 3 days)
30% late penalty
Between 72 and 96 hours late (i.e., 4 days)
40% late penalty
Between 96 and 120 hours late (i.e., 5 days)
50% late penalty
Over 120 hours late (i.e., 5 days)
100% late penalty
Topics covered: Investment setting; Equity valuation; and The top-down approach to market, industry,
and company analysis.
1
Question 1: Measures of Return and Risk (20 marks)
Assume the following information of two investments A and B are possible in 2024:
Economic Status
Weak Economy
Static Economy
Strong Economy
Rate of Return
Investment A
Investment B
-4%
-6%
6%
6%
12%
14%
Probability
0.50
0.20
0.30
a) Compute the standard deviation and coefficient of variation of the rate of return for each
investment?
(10 marks)
b) Based on the results calculated above, if you are not a risk-taker, which investment should you
invest in? Explain.
(10 marks)
(Show ALL workings)
Question 2: Security Market Line (20 marks)
Assume you are an investor based in New Zealand. For each scenario below, draw a labelled graph of the
Security Market Line (SML) and show graphically the effects of the corresponding changes on the SML
(one graph for each scenario). You do not need to make any assumptions in drawing graphs regarding
risk free rate, inflation rate, market return, etc. Explain your answers (maximum of 100 words per
question).
a) The expected long-run growth rate of the New Zealand economy increases by 1% (estimated from
Statista (2024));
(5 marks)
b) The expected rate of inflation decreases by 1% (estimated from Tradingeconomics (2024));
(5 marks)
c) The yield spread between Bbb corporate bonds and Aaa corporate bonds decreases from 60 basis
points to 30 basis points (estimated from Interest (2024)); and
(5 marks)
d) The Economic Policy Uncertainty Index of New Zealand has dropped from 142 to 120 (estimated
from Policyuncertainty (2024)).
(5 marks)
2
Question 3: Free Cash Flow to the Firm (FCFF) (40 marks)
Assume you consider acquiring a company ALA with the following information:
Sales in 2023
Sales growth for five years (2024 - 2028)
Sales growth after 2028
Operating margin
Tax rate
Net margin
Debt
Pre-tax cost of debt
Number of shares outstanding
Book value of equity
Book value of assets
Percentage of NOPAT reinvestment:
Reinvestment rate for five years (2024- 2028)
Reinvestment rate after 2028
Market value of equity
Market value of debt
Cost of equity
60.00
4.00
2.50
35.00
28.00
20.00
35.00
4.50
12.00
55.00
90.00
billion $
%
%
%
%
%
billion $
%
billion
billion $
billion $
16.00
10.00
160.00
35.00
11.00
%
%
billion $
billion $
%
a) Using the Free Cash Flow to the Firm (FCFF) model, estimate the Enterprise Value (EV) of ALA
and the intrinsic value of the ALA stock.
(20 marks)
b) If the Free Cash Flow to Equity (FCFE) model is used, without any calculations, will the intrinsic
value of the ALA stock increase or decrease? What are the reasons of this change? Explain.
(maximum of 200 words)
Note: Please refer to the Case study 1 on the course LEARN page for your research.
(20 marks)
(Show ALL workings)
Question 4: The Top-Down Approach (20 marks)
Please answer the following regarding the Market Analysis (maximum of 150 words per question):
a)
Explain why or why not you recommend Gross Domestic Product (GDP) growth rate to your
clients (who want to invest in stocks) for the Aggregate Market Analysis in the Top-Down
Approach.
(10 marks)
b)
Assume your clients want to invest in stocks in the Asia Pacific markets in 2024 and use a
leading indicator such as Manufacturing PMI (Performance of Manufacturing Index) (data
available at https://tradingeconomics.com/countries, see the Asia and Australia columns)
for decision making.
Based on the Manufacturing PMI data solely, which stock markets in the Asia Pacific region
would you like to advise your clients to invest in? Explain your decisions.
(10 marks)
[TOTAL 100 MARKS]
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