1. As a student, are you saving or borrowing? Why?
2. Discuss why people are investing. Define investment in your own words
BHP Group Limited operates as an international resources company. The Company explores and
mines minerals such as coal, iron ore, gold, titanium, ferroalloys, nickel, and copper properties,
as well as offers petroleum exploration, production, and refining services. BHP Group serves
customers worldwide. Beyond iron ore, its activities include exploration and development of
untapped resources, extraction and processing of commodities, as well as rehabilitation and
closure of operational sites, primarily in Australia and the Americas. BHP has significant annual
productions of iron ore (more than 230 Mt), petroleum (some 210 Mamboed), coal (70 Mt), and
copper (63 Kt).
Rio Tinto Limited is an international mining company. The Company has interests in mining for
aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide
feedstock, diamonds, talc and zircon. Rio Tinto Limited, one of the world’s largest mining
operations (along with BHP Billiton and Vale), is the Australian half of dual-listed sister
companies, with Rio Tinto plc taking up residence in London. Although each company trades
separately, the two Rio Tantos operate as one business. Rio Tinto explores for a variety of
commodities: bauxite, coal, copper, diamonds, gold, iron ore, minerals (borates and titanium
dioxide), nickel, and potash. Iron ore makes up about 44% of the group’s sales. It also produces
aluminum through its Rio Tinto Alcan unit. Most of its businesses are in Australia and North
America, but it is expanding its operations in China and Mongolia.
Please refer to data available on Yahoo Finance, the company annual report and website to learn
more about BHP Billiton and Rio Tinto.
Purpose of this Assignment
As both BHP Billiton and Rio Tinto are local resources companies - which are publicly listed
companies and also have debt issuances in the investment market via bonds – you have been
assigned to evaluate any risks associated with investing in these companies.
Question One (Total: 15 Marks)
Compare and contrast the credit ratings assigned by either Fitch, Moody’s or S&P Ratings (any
single agency can be used for comparison) to these companies. Based on your research, please
describe the key reasons for difference or similarities in ratings assigned to each. Please provide
some supporting information from their financial statements FY2020.
(2 pages maximum)
Question Two (Total: 10 Marks)
Below are examples of bonds issued by BHP Billiton and Rio Tinto. Calculate the credit risk
premium based on the current yields for each bond.
(5 Marks)
Q.1. Olinda Electronics Inc. produces stereo components that sell at P = $100 per unit. Olindes fixed costs are $200,000, variable costs are $50 per unit, 5,000 components are produced and sold each year, EBIT is currently $50,000, and Olindes assets (all equity financed) are $500,000. Olinda can change its production process by adding $400,000 to assets and $50,000 to fixed operating costs. This change would (1) reduce variable costs per unit by $10 and (2) increase output by 2,000 units, but (3) the sale price on all units would have to be lowered to $95 to permit sales of the additional output. Olinda has tax loss carry forwards that cause its tax rate to be zero, it uses no debt, and its average cost of capital is 10%.
______ 1. The market risk premium is 15% and the risk-free rate is 5%. The beta of Asset D is 0.2. What is Asset D expected return under the CAPM? (4.0 point) A) 7% B) 20% C) 30% D) 8% ______ 2. If an asset expected return plots above the security market line, the asset is:(3.0 point) A) overpriced B) fairly priced (if it has an unusually large amount of unique risk). C) underpriced D) A and C E) None of the above ______ 3. The beta of the market portfolio is (3.0 point) A) 1.0 B) 0.5 C) 0 D) -1.0 ______ 4. The risk-free rate for the next year is 3%, and the market risk premium is expected to be 10%. The beta of Acme stock is 1.5. If you believe that Acmes stock will actually return 18.2% over the next year, then according to the CAPM you should:(2.0 point) A) sell the stock because it is overpriced B) be indifferent between buying and selling the stock C) buy the stock because it is underpriced D) buy the stock because it is overpriced E) sell the stock because it is underpriced ______ 5. Market risk is also called (2.0 point) A) non-diversifiable risk and systematic risk B) unique risk and non-diversifiable risk C) systematic risk and diversifiable risk D) systematic risk and unique risk E) None ______ 6. To achieve maximum diversification in a two-asset portfolio, investors should choose stocks with correlation of (2.0 point) A) -0.5 B) -1.0 C) +1.0 D) +0.5 E) None ______ 7.
Which of the following portfolio construction methods starts with asset allocation? (2.0 point) A) Top-down B) Bottom-up C) Middle-out D) Buy and hold E) Asset allocation ______ 8. Financial assets permit all of the following except ____________. (2.0 point) A) consumption timing B) allocation of risk C) separation of ownership and control D) elimination of risk E) All ______ 9. A fixed-income security pay ____________. (2.0 point) A) a fixed level of income for the life of the owner B) a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security C) a variable level of income for owners on a fixed income D) a fixed or variable income stream at the option of the owner E) None ______ 10. A disadvantage of using stock options to compensate managers is that (2.0 point) A) it encourages mangers to undertake projects that will increase stock price. B) it encourages managers to engage in empire building C) incarcerate an incentive for managers to manipulate information to prop up a stock price temporarily giving them a chance to cash out before the price return D) All E) None ______ 11. Although derivatives can be used as speculative instruments, businesses most often use them to (2.0 point) A) attract customers B) appease stockholders C) offset debt D) hedge E) enhance their balance sheets ______ 12. The means by which individuals hold their claims on real assets in a well-developed economy are (2.0 point) A) investment assets B) depository assets C) derivative assets D) financial assets E) exchange-driven assets ______ 13. Important trends changing the contemporary investment environment are (2.0 point) A) globalization B) securitization C) information and computer networks D) financial engineering E) All ______ 14.
Theoretically, takeovers should result in ___________. (2.0 point) A) improved management B) increased stock price C) increased benefits to existing management of taken over firm D) A and B E) A, B and C ______ 15. Investment bankers perform the following role(s) ___________. (2.0 point) A) market new stock and bond issues for firms B) provide advice to the firms as to market conditions, price, etc. C) design securities with desirable properties D) All E) None ______ 16. Corporate shareholders are best protected from incompetent management decisions by (2.0 point) A) the ability to engage in proxy fights B) managements control of pecuniary rewards. C) the ability to call shareholder meetings D) the threat of takeover by other firms. E) one-share / one-vote election rules ______ 17. Financial assets ______. (2.0 point) A) directly contribute to the country’s productive capacity B) indirectly contribute to the country’s productive capacity C) contribute to the country’s productive capacity both directly and indirectly D) do not contribute to the country’s productive capacity either directly or indirectly E) are of no value to anyone ______ 18. Firms that specialize in helping companies raise capital by selling securities are called ________. (2.0 point) A) commercial banks B) investment banks C) savings banks D) credit unions E) All ______ 19. _______ are examples of financial intermediaries. (2.0 point) A) Commercial banks B) Insurance companies C) Investment companies D) Credit unions E) All ______ 20. The value of a derivative security _______. (2.0 point) A) depends on the value of the related security B) can only cause increased risk C) is unrelated to the value of the related security D) has been enhanced due the recent misuse and negative publicity regarding these instruments E) is worthless today ______ 21. The ____________ refers to the potential conflict between management and shareholders due to managements control of pecuniary rewards as well as the possibility of incompetent performance by managers. (2.0 point) A) agency problem B) diversification problem C) liquidity problem D) solvency problem E) regulatory problem ______ 22. An example of a derivative security is ______. (2.0 point) A) a common share of General Motors B) a call option on Mobil stock C) a commodity futures contract D) B and C E) A and B ______ 23. _______ are financial assets (2.0 point) A) Bonds B) Machines C) Stocks D) A and C E) A, B and C
1. Compute a recent five-year average of the following ratios for three companies of your choice (attempt to select diverse firms):
a. Retention rate
b. Net profit margin
c. Equity turnover
d. Total asset turnover
e. Total assets/equity
Based on these ratios, explain which firm should have the highest growth rate of earnings.
2. You have been reading about the Maddy Computer Company (MCC), which currently retains 90 percent of its earnings ($5 a share this year). It earns an ROE of almost 30 percent. Assuming a required rate of return of 14 percent, how much would you pay for MCC on the basis of the earnings multiplier model? Discuss your answer. What would you pay for Maddy Computer if its retention rate was 60 percent and its ROE was 19 percent? Show your work.
3. Gentry Can Company’s (GCC) latest annual dividend of $1.25 a share was paid yesterday and maintained its historic 7 percent annual rate of growth. You plan to purchase the stock today because you believe that the dividend growth rate will increase to 8 percent for the next three years and the selling price of the stock will be $40 per share at the end of that time.
a. How much should you be willing to pay for the GCC stock if you require a 12 percent return?
b. What is the maximum price you should be willing to pay for the GCC stock if you believe that the 8 percent growth rate can be maintained indefinitely and you require a 12 percent return?
c. If the 8 percent rate of growth is achieved, what will the price be at the end of Year 3, assuming the conditions in Part b?