Assignment 01

Submitted To:

Faculty: Riyashad Ahmed (RYA)

Course: Corporate Finance-I (FIN 421)

Section: 02

Submitted By:

Kazi Iqbal Bahar 13104039

Saleh Md. Abu Sinan 14104108

Kazi Md. Nafis Adnan 13304082

Mahmud Ullah Khan 14304065

Summer 2017

Date: 19.6.2017
Bartman Industries and Reynolds Inc.’s stock prices and dividends, along with the Winslow
5000 Index, are shown here for the period 2010-2015. The Winslow 5000 data are adjusted to
include dividends.

BARTMAN REYNOLD WINSLOW

INDUSTRIES INCORPORATED 5000
Year Stock Price Dividend Stock Price Dividend Includes
Dividends
2015 $ 15.250 $ 2.50 $ 55.750 $ 3.500 $ 12,550.98
2014 11.750 1.150 58.300 3.950 8,585.70
2013 12.500 1.490 53.750 2.950 8,189.98
2012 16.750 1.600 59.000 2.550 7,444.03
2011 18.375 1.866 57.500 2.500 7,722.28
2010 17.625 1.500 56.750 3.600 6,444.00

a. Use the data given to calculate annual returns for Bartman, Reynolds, and Winslow
5000(Market Index), and then calculate average returns over the five-year period.

Answer:

Average Returns of BARTMAN INDUSTRIES (Annual)

Year Calculation and Result

2011 =(18.375-17.625+1.866)/17.625
= 14.84%
2012 =(16.75-18.375+1.6)/18.375
= -0.14%
2013 = (12.5-16.75+1.49)/16.75
= -16.48%

2014 =(11.75-12.5+1.15)/12.5
= 3.20%
2015 =(15.25-11.75+2.5)/11.75
= 51.06%
Average Rate of (14.84 - 0.14-16.48+ 3.20+ 51.06)/5
Return = 10.499%

Average Returns of REYNOLDS INCORPORATED (Annual)

Year Calculation and Result

2011 =(57.5-56.75+2.5)/56.75
= 5.73%
2012 = (59-57.5+2.55)/57.5
= 7.04%
2013 = (53.75-59+2.95)/59.3
= -3.88%
2014 = (58.3-53.75+3.95)/53.75
= 15.81%

2015 = (55.75-58.3+3.5)/58.3
= 1.63%
Average Rate of = (5.73+7.04-3.88+15.81+1.63)/5
Return = 5.267%

Average Returns of WINSLOW 5000 (Annual)

Year Calculation and Result

2011 =(7722.28-6444)/6444
= 19.84%
2012 = (7444.03-7722.28)/7722.28
= -3.60%
2013 = (8189.98-7444.03)/7444.03
= 10.02%
2014 =(8585.7-8189.98)/8189.98
= 4.83%
2015 =(12550.98-8585.7)/8585.7
= 46.18%
Average Rate of =( 19.84 – 3.60 + 10.02 + 4.83 +46.18)/5
 Return = 15.454%

A company’s “Average rate of return” is considered as the “Expected rate of return” for
that company. Expected rate of return shows how much return an investor can expect, if they
choose to invest in that company.

Here, the expected rate of return “10.499%” Bartman Industries, 5.267% Reynolds
Incorporated and 15.454% for Winslow 5000.

b. Calculate the standard deviations of the returns for Bartman, Reynolds, and the
Market Index.

Answer:

“Standard Deviation” shows the total amount of risk one has to carry in order of get the
expected return.

For Bartman Industries it is, 25.29%

For Reynolds Incorporated it is, 7.27%

For Winslow 5000 it is, 19.16%

c. Now calculate the coefficients of variation for Bartman, Reynolds, and the Market
Index.

Answer:

Coefficient of Variation shows for each unit of return how much risk does one have to carry.

Standard Deviation
Coefficient of Variation (CV) =
Average Rate of Return
 25.29
Bartman Industries, CV = = 2.41
10.49

7.27
Reynolds Incorporated, CV = = 1.38
5.267

19.16
Market Index, CV = = 1.24
15.454

d) Construct a scatter diagram that shows Bartman’s and Reynolds’s return on the
vertical axis and the market indexes returns on the horizontal axis.

Answer:

Scatter Diagram for Reynold

20.00%

15.00%

10.00%
Reynold

5.00%

0.00%
-10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

-5.00%

Winslow
 Scatter Diagram for Bartman

60.00%

50.00%

40.00%
Bartman

30.00%

20.00%

10.00%

0.00%
-10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00%
-10.00%

-20.00%

Winslow

e) Estimate Bartman’s and Reynold’s betas by running regressions of their returns

against the Market Index’s returns. Are these betas consistent with your graph?

Answer:

SUMMAR
Y
OUTPUT
OF
Bartman's

Regression Statistics
0.872937
Multiple R 43
0.762019
R Square 75
Adjusted R 0.682693
Square 01
Standard 0.142462
Error 85
Observatio
ns 5

ANOVA
Significan
  df SS MS F ce F
0.19496 0.19496 9.60608
Regression 1 2 2 8 0.053322
Residual 3 0.06088 0.02029
 7 6
0.25584
Total 4 9      

Standa
Coefficie rd Lower Upper Lower Upper
  nts Error t Stat P-value 95% 95% 95.0% 95.0%
- -
0.073044 0.08578 - 0.19995 0.3460 0.19995
Intercept 3 2 0.85151 0.45706 -0.34604 2 4 2
-
X Variable 1.151986 0.37168 3.09936 0.05332 2.33485 0.0308 2.33485
1 02 4 9 2 -0.03088 1 8 1

SUMMARY OUTPUT OF
Reynold

Regression Statistics
Multiple R 0.369514
R Square 0.136541
Adjusted R
Square -0.15128
Standard
Error 0.078018
Observations 5

ANOVA
Significanc
  df SS MS F eF
Regression 1 0.002888 0.002888 0.474397 0.540457
Residual 3 0.01826 0.006087
Total 4 0.021148      

Coefficient Standard Upper Lower Upper

  s Error t Stat P-value Lower 95% 95% 95.0% 95.0%
Intercept 0.074337 0.046977 1.582393 0.211711 -0.07517 0.223839 -0.07517 0.223839
X Variable 1 -0.1402 0.203548 -0.68876 0.540457 -0.78798 0.507583 -0.78798 0.507583

Bartman's Beta 1.15 Reynold's Beta -0.14

f) The risk-free return on long-term Treasury bond is 6.04%. Assume that the market
risk premium is 5%.What is the expected return on the market? Now use the SML
equation to calculate the two companies required return.

Answer:
Here,

Risk free return is 6.04%

Market risk premium is 5%

Required return of BARTMAN INDUSTRIES:

Required return= Risk Free Return+ (Market Premium * Beta)

= 6.04+ (5* 1.15)

= 6.04 + 5.75

= 11.79%

Required return of REYNOLDS INC.:

Required return= Risk Free Return+ (Market Premium * Beta)

= 6.04 + (5* -0.14)

= 6.04 + (-.0.7)

= 5.34%

g) If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what
would be its beta and its required return?

Answer:

Calculating portfolio’s Beta:

Company Bartman Reynolds inc.

industries (50%)
(50%)
Beta 1.15 -0.14

Formula of portfolio Beta=∑ ωi∗βi

 = (.50 * 1.15) + (.50* - 0.14)

= 0.575+ (-0.07)

= 0.505

A portfolio Beta of 0.505 means that this portfolio is theoretically less volatile than the
market.

Portfolio required rate of return:

Portfolio required return = Risk free return+ (Market Premium * Portfolio Beta)

= 6.04 + (5 * 0.505)

= 8.57%

An investor would require a minimum return of 8.57 % to consider an investment in this

portfolio worthwhile.

h) Suppose an investor wants to include Bartman Industries stock in his or her

portfolio. Stocks A, B, C are currently in the portfolio; and their betas are 0.769, 0.985,
and 1.423 respectively. Calculate the new portfolios required return if it consists of 25%
of Bartman, 15% of stock A, 40% of Stock B, and 20% of Stock C.

Answer:

Stock ωi βi
Bartman 25% 1.15
A 15% 0.769
B 40% 0.985
C 20% 1.423

Now,

New portfolio Beta = ∑ ωi * βi

 = (.25*1.15) + (.15*0.769) + (.40*0.985) + (.20*1.423)

= 1.081

Portfolio required return =

Risk free return+ (Market Premium) * Portfolio Beta

= 6.04 + (5 * 1.081)

= 11.445%