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Assignment 1: Finance Part 1 (50 marks): Question 1 (15 marks): Choose a publicly traded company that has been listed on the Egyptian Exchange (EGX) for at least five years

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Assignment 1: Finance

Part 1 (50 marks):

• Question 1 (15 marks):

Choose a publicly traded company that has been listed on the Egyptian Exchange (EGX) for at least five years. Use any data source of your choice to find the annual dividend paid by the company in each of the past five years. Also, find the closing price of the stock at the end of each of the preceding five years.

1. Calculate the return for each of the five one-year periods (5 marks).
2. Create a graph that shows the return that the investment earned on the y-axis and the year in which the return was earned on the x-axis (5 marks).
3. On the basis of the graph in part b, estimate the return for the coming year, and explain your answer (5 marks).

• Question 2 (15 marks):

In early 2009, General Electric (GE) had a book value of equity of $105 billion, 10.5 billion shares outstanding, and a market price of $10.80 per share. GE also had cash of $48 billion, and total debt of $524 billion. Three years later, in early 2012, GE had a book value of equity of $116 billion, 10.6 billion shares outstanding with a market price of $17 per share, cash of $84 billion, and total debt of $410 billion. Over this period, what was the change in GE’s:

1. market capitalization? (3 marks)
2. market-to-book ratio? (3 marks)
3. enterprise value? (3 marks)
4. Discuss the difference between the “market capitalization” and the “enterprise value” as two different measures of the firm value. Use your own words to suggest your preference for one of them. (6 marks).

• Question 3 (20 marks):

On January 1, 2017, Dave Coates, a 23-year-old mathematics teacher at Xavier High School, received a tax refund of $1,100. Because Dave didn’t need this money for his current living expenses, he decided to make a long-term investment. After surveying a number of alternative investments costing no more than $1,100, Dave isolated two that seemed most suitable to his needs.

Each of the investments cost $1,050 and was expected to provide income over a 10-year period. Investment A provided a relatively certain stream of income. Dave was a little less certain of the income provided by investment B. From his search for suitable alternatives, Dave found that the appropriate discount rate for a relatively certain investment was 4%. Because he felt a bit uncomfortable with an investment like B, he estimated that such an investment would have to provide a return at least 4% higher than investment A. Although Dave planned to reinvest funds returned from the investments in other vehicles providing similar returns, he wished to keep the extra $50 ($1,100 - $1,050) invested for the full 10 years in a savings account paying 3% interest compounded annually.
As he makes his investment decision, Dave has asked for your help in answering the questions that follow the expected return data for these investments.

Questions:

1. Assuming that investments A and B are equally risky and using the 4% discount rate, apply the present value technique to assess the acceptability of each investment and to determine the preferred investment. Explain your findings (3 marks).
2. Recognizing that investment B is more risky than investment A, reassess the two alternatives, adding the 4% risk premium to the 4% discount rate for investment A and therefore applying a 8% discount rate to investment B. Compare your findings relative to acceptability and preference to those found for question a (3 marks).
3. From your findings in questions a and b, indicate whether the IRR for investment A is above or below 4% and whether that for investment B is above or below 8%. Explain (3 marks).
4. Use the present value technique to estimate the IRR on each investment. Compare your findings and contrast them with your response to question c (3 marks).
5. From the information given, which, if either, of the two investments would you recommend that Dave make? Explain your answer (4 marks).
6. Indicate to Dave how much money the extra $50 will have grown to by the end of 2026, assuming he makes no withdrawals from the savings account (4 marks).

Part 2 (50 marks):

• Question 4 (20 marks):

Briefly discuss the investment appraisal process.

• Question 5 (30 marks):

Given the following balance sheet, income statement, historical ratios and industry averages, calculate the Pulp, Paper, and Paperboard, Inc. financial ratios for the most recent year. Analyze its overall financial situation for the most recent year. Analyze its overall financial situation from both a cross-sectional and time-series viewpoint. Break your analysis into an evaluation of the firm's liquidity, activity, debt, and profitability.

Income Statement

Pulp, Paper, and Paperboard, Inc.

For the Year Ended December 31, 2013

 

Balance Sheet

Pulp, Paper, and Paperboard, Inc.

December 31, 2013

 

Historical and Industry Average Ratios

Pulp, Paper and Paperboard, Inc.