Finance Financial Management Group Assignment 2019–20

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This document describes the coursework component for Finance & Financial Management which counts for 40% of the final mark for the course. You are required to complete this coursework in groups. Details of the questions are given below. Assignment Each coursework group is required to choose two real-life companies (Company A & Company B) that are publicly traded on the main market of the London stock exchange. The two companies can be selected from the FTSE 100 Index.

The list of companies that constitute the FTSE 100 Index can be downloaded from the following website: Please note that the list can also be downloaded from, for example, Yahoo Finance, Bloomberg, or Datastream. One of the companies (Company A) you select must not be from the financial sector (e.g., cannot be a bank or an insurance company). Further, neither company (A or B) can be an investment fund (e.g., you should not use Aberdeen Asset Management Plc as one of the two companies). It is the responsibility of each team (and all team members) to collect all necessary data required to complete the assignment.

Paper For Above instruction

Part 1: Analysis of Stock Performance and Portfolio Construction

To commence, groups must select two companies from the FTSE 100 index, ensuring one is from a non-financial sector and neither is an investment fund. The aim is to analyze the stocks’ return performance and construct optimal portfolios. Data on monthly or weekly stock returns from January 2009 to December 2018 (or January 2014 to December 2018 for weekly data) will be used.

1. Individual Stock Analysis

Advising an investor considering investing in either Company A or Company B's stock, you should provide an overview of each company. This includes their core business activities, market position, and recent performance. Next, analyze and compare their stock return behaviors over the sample period by calculating the mean, variance, and standard deviation of their monthly or weekly returns. Briefly interpret these results and make a stock recommendation based on risk-return considerations.

2. Portfolio Analysis and Optimization

Next, advise on a portfolio that combines both companies’ stocks with varying weights (e.g., 50:50, 10:90, etc.). Calculate the mean, variance, and standard deviation of returns for each portfolio configuration. Prepare a table summarizing these results. Graphically, plot the trade-off between expected return and risk (standard deviation) for the different portfolios, highlighting the efficient frontier and identifying the minimum-variance portfolio. Report the portfolio weights, and the returns, variance, and standard deviation of this minimum-variance portfolio. Discuss how an investor might choose an optimal portfolio considering risk preferences, and comment on how the inclusion of risk-free assets could alter investment strategies.

Part 2: Cost of Capital Estimation for Company A

Management of Company A requests an assessment of the appropriate discount rate for evaluating investment projects. You will estimate the required rate of return on equity using two methods: the Capital Asset Pricing Model (CAPM) and the Dividend Discount Model (DDM). For CAPM, you'll need to compute the beta coefficient via regression analysis of Company A’s excess returns against market excess returns; for DDM, you'll estimate growth rates and dividends. Additionally, determine the company’s cost of debt by examining its latest debt data—using the yield approach, summing the risk-free rate and a credit spread based on the company’s credit rating. If possible, adjust for taxes to find the after-tax cost of debt.

Combine these estimates to determine the company’s weighted average cost of capital (WACC), considering the proportions of equity and debt. Clearly document each step, stating whether data is monthly, weekly, or yearly, justify your choices, and discuss assumptions. Provide critical evaluation of potential limitations and suggest improvements for future analysis.

Data Collection and Methodology

Data required includes stock prices, dividends, debt levels, credit ratings, and risk-free rates, all obtainable via Yahoo Finance, Bloomberg, Datastream, or company filings. Raw data should be processed to compute holding period returns, aligning data periods, and converting units as necessary. For beta estimation, software such as Excel, utilizing the regression tools, is recommended. All calculations should be thoroughly explained, with assumptions and methods justified.

References

  • Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
  • Fama, E. F., & French, K. R. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), 25–46.
  • Howard, J. (2015). Financial Management: Principles and Applications. McGraw-Hill Education.
  • Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky Investment in Stock Portfolios and Capital Budgets. The Review of Economics and Statistics, 47(1), 13–37.
  • Sharpe, W. F., & Alexander, G. J. (1990). Modern Investment Management. Prentice Hall.
  • Symons, W., & Pain, P. (2018). Financial Management: Theory & Practice. Pearson Education.
  • van Horne, J. C., & Wachowicz, J. M. (2005). Fundamentals of Financial Management. Pearson Education.
  • Weston, J. F., & Brigham, E. F. (2014). Managerial Finance. Cengage Learning.
  • Yardeni, E. (2018). The New Investment Climate: Technology, Trade, and Investment. Cambridge University Press.

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