BBMF 2063 Investment and Financial Analysis

Semester 1 (2020/2021)
Tutorial 1

True and False

1. A Chinese stock denominated in Chinese yuan will have an increase in its dollar-denominated
return if the Chinese yuan strengthens against the dollar. ( √ )
2. Total return is equal to capital gain deduct loss. ( x )
3. The less the variability of return, the greater the risk. ( x )

Essay questions

1. Calculate the total returns (TR) and the return relatives (RR) in term of Euro for the following
assets:
i. A preferred stock bought for €70 per share, held one year during which €5 per dividend
are collected and sold for €62.
Total return (TR) = Yield+ (Selling Price-Buying Price) ÷ Buying Price
€ 62+ € 5−€ 70
=
€ 70
= €-0.04286 (-4.29%)

Return Relatives (RR) = 1 + HPR

= 1+ (-0.04286)
= €0.9571

ii. A 12 percent bond bought for €830, held two years during which interest is collected,
and sold for €920 (assume no reinvestment).
Yield=12% Coupon=1000
Total return (TR) = Yield+ (Selling Price-Buying Price) ÷ Buying Price
( € 1000 x 12 %x2 )+(€ 920−€ 830)
=
€ 830
= €0.3976 (39.76%)

Return Relatives (RR) = 1 + HPR

= 1+ €0.3976
= €1.3976
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)

iii. Calculate the international returns (in term of Dollar) for question (i) and (ii) if Euro
appreciate from $1.25/€ to 1.35/€.
(i) International Return= Relative Return x
End value of Foreign Currency
-1
Beginning Valueof ForeignCurrency
$ 1.35/ €
= €0.9571 x –1
$ 1.25/ €
= $0.0337 (3.37%)

(ii) International Return= Relative Return x

End value of Foreign Currency
-1
Beginning Valueof ForeignCurrency
$ 1.35/ €
= €1.3976 x -1
$ 1.25/ €
= $0.5094 (50.94%)

2. Bond A’a return from 2001 – 2004: -11.85%, -22.10%, 28.37%, and 10.75% respectively.
iv. Calculate the arithmetic and geometric mean rate of return of bond A
(−11.85 % )+(−22.10 %)+(28.37 %)+(10.75 %)
AM=
4
= 0.0129

1
GM= [(1−0.1185 )(1−0.2210)(1+0.2837)(1+0.1075)]4 –1
= -0.00598

v. If you had invested $100,000 in Bond A since beginning of year 2001, determine the
value of this bond at the end of 2004.
BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)

vi. Calculate the standard deviation of Bond A

2. Use the following information to answer the questions below:

Stock A Stock B
Return Probability Return Probability
10% 0.3 15% 0.3
5% 0.2 7% 0.1
2% 0.2 3% 0.1
-3% 0.2 -8% 0.2
-5% 0.1 -14% 0.3
Calculate expected return and standard deviation for both stocks.

Stock A:
Possible Probability (2) (1)x(2) Ri- E(R) ( Ri−E( R))2 (Ri−E( R))2 pr
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
i
Return (1)
0.10 0.3 0.03 0.067 0.004489 0.0013467
0.05 0.2 0.01 0.017 0.000289 0.0000578
0.02 0.2 0.004 -0.013 0.000169 0.0000338
-0.03 0.2 -0.006 -0.063 0.003969 0.0007938
-0.05 0.1 -0.005 -0.083 0.006889 0.0006889
1.0 0.033 (E(R)) 0.002921
1
Standard deviation= (0.002921)2 = 0.054 = 5.4%

Stock B:
Possible Probability (2) (1)x(2) Ri- E(R) ( Ri−E( R))2 (Ri−E( R))2 pr
Return (1) i

0.15 0.3 0.045 0.153 0.023409 0.0070227

0.07 0.1 0.007 0.073 0.005329 0.0005329
0.03 0.1 0.003 0.033 0.001089 0.0001089
-0.08 0.2 -0.016 -0.077 0.005929 0.0011858
-0.14 0.3 -0.042 -0.137 0.018769 0.0056307
1.0 -0.003 (E(R)) 0.014481

1
Standard deviation= 0.014481 2

= 0.1203= 12.03%
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
Tutorial 2

True and False

1. Portfolio risk can be reduced by reducing portfolio weights for assets with positive correlations.
( √ )
2. An efficiently diversified portfolio has no market risk. ( X )
3. The correlation coefficient explains the cause in the relative movement in returns between two
securities. ( X )
4. Investments in precious metals may provide additional diversification opportunities for
portfolios consisting primarily of stocks and bonds. ( √ )

Essay Questions

1. Many investors have known for years that they should not “put all their eggs in one basket.”
How does the Markowitz analysis shed light on this old principle?
This is a piece of advice which means that one should not concentrate all efforts and resources in
one area as one could lose everything. Investments like eggs are fragile, and every investor
should be aware of diversification as a fundamental principle for alleviating risk, for exp by
holding different forms of investments such as equities, debt instruments and deposits. Like eggs
in multiple baskets, if one fails, the others may still be good. Stocks, for example bring the
highest returns in a rising market and growing economy, but we should not put all our cash into
stocks, since they can take unexpected hits, whether within the individual stock or from overall
market and economic conditions.
Example, 2 assets in one basket, asset x get low return but asset y get high return, both assets
move in different direction. When COVID-19, return X lower, return Y higher, still make
money.

2. Which factors determine portfolio risk?

In the Markowitz model, there are three factors determine portfolio risk which include individual
variances, the covariance between securities, and the weights (percentage of investable funds)
given to each security.

3. Evaluate the following statements: As the number of securities held in a portfolio increases, the
importance of each individual security’s risk decreases.
This statement is correct. As the number of securities in a portfolio increases, the importance of
the covariance relationships increases while the importance of each individual security's risk
decreases because the standard deviation of the individual asset is less important.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)

4. Use the following information to answer the questions below:

Day KLCI Stock A Stock B
Return Return Return
January 15% 10% 15%
February 8% 5% 7%
March 6% 2% 3%
April -2% -3% -8%
May -5% -5% -14%

i. Calculate expected return and standard deviation for both stocks.

0.10+0.05+0.02−0.03−0.05
Stock A E(R) =
5
= 0.018 (1.80%)
0.15+ 0.07+0.03−0.08−0.14
Stock B E(R) =
5
= 0.006 (0.60%)

Stock A SD
=
5

√ ∑ (0.10−0.018)2 +(0.05−0.018)2 +(0.02−0.018)2 +(−0.03−0.018)2 +(−0.05−0.018)2

t =1

= 0.0606 (6.06%)
5−1

Stock B SD
=
5

√ ∑ ( 0.15−0.006 )2 +( 0.07−0.006 )2+( 0.03−0.006 )2+(−0.08−0.006 )2+ (−0.14−0.006 )2

t =1

= 0.1163 (11.63%)
5−1

ii. Find out the correlation between Stock A and Stock B, calculate portfolio risk and return
based on following combination:
n

Cov (RA,RB)=
∑ (RAi−E[RA ])(RBi−E [ RB ] )
1
n−1
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
=
5

∑ ( 0.10−0.018 )( 0.15−0.006 ) +( 0.05−0.018 ) ( 0.07−0.006 ) +( 0.02−0.018 ) ( 0.003−0.006 )+ ¿ (−0.03

1
5−1
= 0.00699

Cov (RA , RB )
Corr (RA,RB)=
SD( RA) SD( RB)
0.00699
=
(0.0606)(0.1163)
= 0.9918

a. 70% invested in Stock A, 30% in Stock B

E(RP)=(0.70*0.018) + (0.30*0.006)
= 1.44%
SD= √ (0.70)2 (0.0606)2 +(0.30)2 (0.1163 )2 +2( 0.7)(0.3)(0.0606)(0.1163)(0.9918)
= 0.07715

b. 50% invested in Stock A, 50% in Stock B

E(RP)=(0.50*0.018) + (0.50*0.006)
= 1.20%
SD= √ (0.50)2 (0.0606)2 +(0.50)2 (0.1163 )2 +2( 0.5)( 0.5)( 0.0606)(0.1163)(0.9918)
= 0.08828

c. 30% invested in Stock A, 70% in Stock B

E(RP)=(0.30*0.018) + (0.70*0.006)
= 0.96%
SD= √ (0.30)2 (0.0606)2 +(0.70)2 (0.1163 )2 +2( 0.3)( 0.7)(0.0606)(0.1163)(0.9918)
= 0.09948

5. Shall we include Bitcoin into portfolio?

We can have a small portion of Bitcoin in our portfolio. First is because bitcoin is significantly
correlated to any investable asset class, which is great for reducing portfolio risk. Second, bitcoin
can act as currency hedge for a portfolio that is denominated in US Dollars. Bitcoin have the
potential to a dramatic increase in its price. An analyst stated, the optimal portfolio should
include an allocation to bitcoin but just 2% of the portfolio. Bitcoin does add value to a portfolio
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
but only when held in small doses because bitcoin’s volatility has a large negative impact on its
inclusion in a portfolio.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
Tutorial 3

True and False

1. The capital market line (CML) indicates the required return for each portfolio risk level. ( √ )
2. Beta is a measure of systematic risk and relates one security's return to another security's return.
( X )
3. In a declining market, a portfolio manager should attempt to increase the overall beta of the
portfolio. ( X )

Essay Question

1. Using data from Tutorial 2 Question 4, generate Beta of both stocks.

Answer in Excel

2. How can security market line (SML) be used to identify over and undervalued securities?
Security market line (SML) shows the relationship between the expected return on individual
asset and their risk as measured by their relative to the market. When a security is plotted on the
SML chart, if it appears above the SML, it is considered undervalued because it offers more
expected return than investor required under SML. Conversely, if the security plots below the
SML, it is considered overvalued in price because it offers less expected return than investor
required under SML.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
3. Suppose that the risk free rate of 6 percent, the market portfolio expected return and variance is
8 and 7 percent respectively, and the covariance between Stock A and market return is 6 percent.
a. Calculate Stock A’s Beta.
Cov ( Ri , Rm)
β =
σ 2m
0.06
= 0.07
= 0.8571

b. Calculate Stock A’s risk premium

Risk Premium= β [E (Rm)-Rf]
= 0.8571(0.08-0.06)
= 0.017142

c. Calculate Stock A’s required rate of return

E(Ri)= Rf+ βi [E(Rm)-Rf]
= 0.06+ 0.017142
= 0.077142 (7.72%)

4. Suppose that Public Bank Berhad (PBB) pays 10% of return, Treasury bill pays 3% and market
return is 7%. If beta of PBB is 1.16, is PBB a good investment?
E(Ri) = Rf + β i [E(RM) – Rf]
= 3+1.16(7-3)
=7.64%
According to CAPM, the required return of PBB is 7.64%. PBB pays a return of 10% which is
higher than the required return. Therefore, PBB is a good investment for the investor, holding
other factor constant.

5. Suppose that a mutual fund agent approaches you and promote a fund which allows you to
withdraw money from your Employment Provident Fund (EPF) to invest. From the analysis of
the agent, the fund expected to pay up to 11% return, and you know that EPF paid an average
6% return and treasury’s return fixed at 2.75%. Based on the discussion in this chapter and in
your opinion, are you going to take the investment? Justify your answer.
No.
Even given the expected return of Mutual fund is 11%, but it might subject to various risks
depending on its asset distribution.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
The fund might be invested in high risk portfolio which would possibly error my investment
when the fund is not performing well. Also, there are maintenance cost, service fees and trustee
fees charged annually form the Net Asset Value of the FUND.
***Default Risk
***Private Trust Fund – usually penalty charged upon shift of fund  back to EPF

Instead, EPF is a stable investment vehicle which shown a stable average return over the pas-
performance. Even EPF only provide 6% per annum, but its conservative portfolio which is
attractive and provides a stable annual growth of the investment.
*Regulation: Minimum EPF dividend = 2.5%
*Minimum default risk

Since EPF provides stable annual growth with low volatility, I would be going to retain my
capital in EPF rather than withdraw money to invest in the mutual fund.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
Tutorial 4

True and False

1. If interest rates rise, the risk free rate of return declines. ( X )
2. If the economy is prospering, investors expect corporate earnings to rise. ( √ )
3. Stock prices have almost always risen as the business cycle is approaching a trough. ( √ )
4. The utility industry is a good example of a countercyclical industry. ( X )
5. Both countercyclical and defensive stocks will rise during recession. ( X )

Essay Question

1. What is the business cycle?

- Fluctuation found in the aggregate economic activity of nations that organize their work
mainly in business enterprises.
- Cycle has an expected sequence of phases, alternating between expansion and contraction.
- Cycles typically last between 1 and 12 years.
- Cycles are recurrent but not periodic.
Four phases: trough, expansion, peak, contraction.
- During the expansion (contraction) phase, aggregate economic activity is increasing
(declining).
- Business cycles can be thought of as fluctuations around the trend growth of an economy.

2. Explain the relationship between business cycle and yield curve by using graphs.
BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
 Shape of yield curve is related to business cycle.
- Upward sloping and steepening curve imply accelerating economic activity. Businessman
starts to expand business and the demand for borrowing is higher. Hence, the interest rate will
be higher.
Adjust base lending rate, economy is expanding, everyone has money, to control inflation,
government increases interest rate, too expensive for business to borrow
- Flat structure implies a slowing economy
- Inverted curve may imply a recession.
BNM reduce BLR, encourage business to borrow, cost of borrowing cheaper, can do business
and expand business
Not worth to save in bank due to low interest rate.

3. Assume investor can determine the business cycle, when should stocks be purchase?
Slightly before the troughs. This is because, troughs are the point where business activity moves
from contraction to recovery. A sign that the trough has occurred or is about to occur is when
stock prices begin to rally after a significant decline. This rebalancing of the economy makes
new purchases attractive to consumers and new investments in labour and assets attractive to
firms. The stock market is consider a leading indicator an economic series that tend to rise or
fall in advance of the rest of the economy, this is why stocks should be purchase slightly before
the troughs.

4. Why investors are concern about consumer spending?

Because consumer spending is an indicator of how the economy is doing, the stock market and
the economy is closely related. Typically, stock market and economic performance are aligned.
Thus, when the stock market is performing well, it is usually a function of a growing economy.
Often, consumers spend more during bull markets because they are making more from the
effects of a strong economy and also feel wealthier when they see their portfolios rise in value.
During bear markets, the economy is usually not doing as well and spending recedes. A
simultaneous fall in stock values also creates fear for the loss of wealth and purchasing power
as the value of investments contracts.

A rising stock market is usually aligned with a growing economy and leads to greater investor
confidence. Investor confidence in stocks leads to more buying activity which can also help to
push prices higher. When stocks rise, people invested in the equity markets gain wealth. This
increased wealth often leads to increased consumer spending, as consumers buy more goods
and services when they're confident they are in a financial position to do so. When consumers
buy more, businesses that sell those goods and services choose to produce more and sell more,
reaping the benefit in the form of increased revenues. This is why investors are concern about
consumer spending.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
5. What are the stages in the life cycle for an industry? Can you think of other stages to add?

The first stage in the life cycle for an industry is embryonic which is the start-up phase. It shows
slow growth of revenue and loss because the customers are not familiar with the products. As
significant investment is required for the initial stage such as purchasing non-current asset, a
negative cash flow will be formed. As the volumes are not sufficient to achieve economic of scale,
its products are always label at high prices. There is a very high risk for the new entrant to fail and
default. ORGANIC SKINCARE PRODUCT, DRIVELESS CAR, SOLAR (in between
embryonic and growth)
The second stage is growth stage, lead a rapidly increasing in demand as more customers enter into
the market. The business starts to improve its profitability and hence the economies of scale can be
achieved. The price of products is falling slightly because the economies of scale can be achieved
by the volumes. Although the barriers to entry are low, rapidly increasing demand relax the
competition. The companies typically reinvest their earning for expansion purpose rather than pay
dividend to investors. TESLA, NIO, GRAB
Then the industry life cycle enters to third stage which is shakeout stage. The business now has
less new customers, causing a slowing and stable growth. The industry starts to have intense
competition and growth becomes dependent on market share gains. Due to the high competition,
the business is cutting the prices to boost volume or sales to fill excess capacity and hence result the
decline of profitability. The companies focus on reducing the cost structure and building brand
loyalty. FOOD, BUBBLE TEA, FAHSION
Then, industry starts entering the mature stage. As the market is completely saturated, there is little
or no growth. Industry may consolidate and become oligopolies such as banking and finance
industry. There is a high barrier to entry as the surviving companies have brand loyalty and
relatively efficient cost structure. As there is limited reinvestment opportunity, the companies more
likely pay dividends to shareholders. PETROL, BANKING, NESTLE
In the decline stage, the industry has negative growth as the development of substitute or social
changes. The excess capacity due to the declining of demand will cause the price wars. The high
competition causes the declining of revenue, profit and cash inflow. ASTRO, TAXI
The other stage that can be added in business cycle is idea stage and exit stage. The idea or seed
stage is beginning of the business life cycle. This is when business is just a thought or an idea and
requires several rounds of testing in its initial stage. In exit stage, there are two things that company
can do which is to sell the business or shut it down for good.
6. Why industry life cycle is useful to an investor doing analysis?
 Investors often use industry life cycle analysis to measure the relative strength and weakness of
a particular company’s stock. The future growth prospects of a company may be bright
depending on the stage that it is in during an industry life cycle. For example, Embryonic and
Growth will get capital gain, Shakeout and Mature will get dividend gain.

7. What is the essential factor of Porter’s analysis?

Porter’s strategic is the analysis of a competitive environment with an emphasis on the

implications of the environment for corporate strategy.
There are five main component of the Porter’s analysis which is power of suppliers, power of
buyers, rivalry among competitors, threat of entry and Threat of substitutes.
These factors are essential and important for the investor to analysis the prospects and
profitability of a particular industry before involving oneself in the related field.

First, POWER OF SUPPLIER analyze suppliers’ ability to raise price or restrict supply.
Whether there is a strong or weak power of supplier would depend on the Number of suppliers
and Scarcity of supplied products.

Second, POWER OF BUYERS to analyze customers’ ability to bargain lower price or better
product quality. It would mainly depends on the number of customers and their purchasing
power.

Third, RIVALRY AMONG COMPETITORS stated that an Industry experience more intense
competition if that particular industry comprises of many small firms or, there is High fixed
costs; Undifferentiated products; or High exit barriers.

Fourth, THREAT OF ENTRY analyze difficulty of outsiders to establish new firm in the
industry.
If the industry is Low barriers for the entrance of new firm, it indicates a highly competitive
industry as the profits would shared by new entrants.
However, new entrants would need to pay out an Initial capital requirement and must have
sufficient Customer base requirement to support their sustainability.

Fifth, THREAT OF SUBSTITUTES showing the availability of different products/services that

could satisfy same needs. Within the industry, there would be many homogenous products that
has similar characteristics or provide the same need of the customer, could be substitute with
each other. Therefore, when there are more substitutes product available in the market, would
Affecting the pricing power in industry.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
Tutorial 5

True and False

1. The auditor's report guarantees the accuracy of the earnings reported in the financial statements.
( X )
2. Leverage can magnify returns to the stockholders but also increase potential losses to the
stockholders. ( √ )
3. A company may maintain its ROA if the net income margin decreases by increasing its asset
turnover. ( √ )
4. Investors interested in buying stocks that report bad news and suffer a sharp decline should buy
the first day bad news is reported. ( X )
5. The P/E ratio can be expected to change as the expected dividend payout ratio changes. ( √ )

Essay Question

1. What problems do estimating accounting earnings present? Are these problems can resolve by
hiring auditor firms?
The problem with accounting earnings is that there are many accounting principles can be used
to prepare financial statements. Besides, by using one accounting figure it is probably
impossible to estimate the true performance of a company.

Auditor may not able to resolve these problems due to the auditor’s report represent that
generally accepted accounting principles were applied on a consistent basis. However, it does
not guarantee the accuracy or quality of the earnings.

Furthermore, the management of a company hires an auditing firm to prepare the financial
statements. The accounting firm is supposed to follow accounting standards and act
independently. However, management may be able to influence the accounting firm, which
wishes to keep the business, because some flexibility in how certain items are treated does exist.
The management would definitely wanted to present a figure that is attractive to the investor
hence, demanding the accountants to come out with a presentable figure even if it means
dishonesty.

2. How can the earnings growth rates be determined? Will the growth rates persist across time?
By using the payout ratio. Payout ratio is the percentage of a company pay for dividend to the
shareholders. As the payout ratio increase, the dividend pay also increase.
The earnings growth rate, g, is defined as:
g = (1 – Dividend Payout Ratio) x ROE

Where Dividend payout ratio= dividened/net income

ROE= net income/shareholders’ equity

Another methods of measuring the growth are by using average historical earnings growth rate
or the median industry earnings growth rate.
 Earnings growth rates usually do not persist over time. Investors cannot simply assume that a
particular trend will continue. Year-to-year growth rates are often quite variable. Increasing in
payout ratio may affect the retained earnings to fall, which means, company spend less in
conducting business which led to lower growth.

3. What are the variables that affect the P/E ratio? Is the effect direct or inverse for each
component?
Price-to-earnings ratio (P/E ratio)
Price per share
=
Earnings per share

(a.) Growth rate in Earnings :-

 Rate of earnings of a company directly affects the P/E ratio of the company.
 The earnings refers to the Retained earnings of the company. That portion of the Earnings of the
business which is reinvested into the business for the purpose of expansion of business, to
invest in other undertakings for better opportunity, for developing the business, or for any other
purpose for the betterment and advancement of the business.
 Higher growth rate in the earnings of the company directly gets translated in the higher P/E
Ratio.
 Hence, they are direct relationship. The higher the growth rate, the higher the P/E ratio.

(b.) General State of Economy :-

 Economic environment also might affect the P/E ratio.
 Favorable economic environment may increase the P/E ratio of the company. However, poor
economy might cause fall in the P/E ratio.
 Hence, Better overall economic conditions cause higher P/E ratio.
 They are direct relationship. The better the economic outlook, the higher the P/E ratio.

(c.) Debt in company's capital structure :-

 Higher portion of debt in the capital structure causes Lower P/E ratio.
 However, if the company's capital structure comprise of less amount of Debt, then the
company's P/E ratio tends to be higher.
 They are inverse relationship. The lower the debt ratio, the higher the P/E ratio.

(d.) Inflation rate :-

 Inflation causes fall in the P/E ratio of the company.
 Inflation reduces the value of the money hence it discourages the investors, which leads to the
lower P/E ratio as well.
 Hence, Lower the Inflation rate, Higher the P/E ratio of the company.
 They are inverse relationship. The lower the inflation, the higher the P/E ratio.

(e.) Dividend payout ratio :-

 Dividend payout ratio also affects the P/E ratio.
 If company pays out higher portion of the earning as dividend and retains lesser amount in the
business, then the P/E ratio of the company tends to be Lower.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
 Whereas, Lower dividend payout ratio refers to higher retention ratio. So, if the company is
having higher return on investment, then it should retain higher portion of earnings to achieve a
higher P/E ratio.
 They are inverse relationship. The lower the dividend payout, the higher the P/E ratio.

4. Holding everything else remains constant, what effect would the following have on a
company’s P/E ratio?
P0 p
=
E 1 r −g
, r=Rf+βi (ERm−Rf)

a. An increase in the growth rate of earnings

- P/E ratio increases

b. A decrease in the dividend payout

- P/E ratio decreases

c. An increase in the risk-free rate of return

- required rate return increase, P/E decreases

d. An increase in risk premium

- required rate return increase, P/E decrease

e. A decrease in the required rate of return

- P/E ratio increases

5. Assume that Intel announces a 40 percent increase in EPS for its most recent quarter, and the
stock price immediately declines 15 percent while the market as a whole is unchanged. How
would you explain this?
A company might report growing EPS but the stock price might decrease if analyst were
expecting an even higher number. Therefore, when the EPS is 40% and the stock price declines
15%, this is because the results did not meet the investors’ expectations and they might foresee
that Intel would not have any further growth in the future.

6. Shao Electronics has total assets of $550 million, $7.2 billion net income and stock holder’s
equity of $330 million. It has total debt of $225 million.
a. Calculate ROA
Net Income
ROA=
Total Assets

7.2 Billion
= 0.55 Billion
 = 13.091

b. Calculate ROE

Net Income
ROE=
Average shareholders ' equity

7.2 Billion
= 0.33 Billion

= 21.818
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
Tutorial 6

True and False

1. Under the zero-growth dividend model, expected dividends are the same as current dividends.
( √ )
2. If the intrinsic value of stock is greater than the current stock price, the stock is overvalued and
should be sold short. ( X )
3. A number of companies that formerly experienced rapid growth were unable to sustain high
growth rates. These companies included Dell, Yahoo, and Google. ( √ )
4. Declining interest rates in the market should send P/E ratios, on average, higher. ( √ )
5. If the growth rate in dividends is greater than the required rate of return, the price found under
the constant growth model will be negative. ( √ )

Essay Question

1. What is mean by intrinsic value of a stock and how it can be determined?

The meaning of intrinsic value of a stock is the anticipated or calculated value of a company,
currency or fundamental value derived determined through fundamental analysis or valuation
models. Besides, intrinsic value is also called as the real value and may or may not be the same
as the current value. We can determine it by estimating all of a company’s future cash flows,
calculating the present value of each these future cash flows and sum up the present values to
obtain the intrinsic value of the stock. If the intrinsic value is greater than market value, the
stock is considered as undervalued. If the intrinsic value is less than market value, the stock is
considered as overvalued.

2. Why is the required rate of return for a stock used as a discount rate in valuation analysis?
The required rate of return is the minimum return that an investor is expecting to receive for
their investment. The required rate of return is a key concept in corporate finance and equity
valuation. For instance, in equity valuation, it is commonly used as a discount rate to determine
the present value of cash flows. The discount rate represents the compensation that investors
require to assume the risk of investing in that asset in hopes of receiving the future cash flows
generated from it.

3. Describe the three possibilities for dividend growth. Which is the most likely to apply to the
typical large company? Small and medium company?
  Zero Growth Rate Model. In this model, the dividend will remain the same and
generally applied by non-callable, non-convertible perpetual preferred share. The
zero-growth rate model is less likely to be applied as the external environment
factors that might influence business’s incomes will result the change of dividend
growth rate. ( Eg: Sunway)

 Gordon Growth Model (Constant Growth Model). In this model, the dividend will
grow at a constant rate over time and generally applied for large companies which
are mature with stable income and more likely use reserve for dividend payout
rather than for business expansion purpose. (Eg: Nestle)

 Multi-stage growth model. In this model, at least two different growth rates are
involved. Many multiple-growth-rate companies grow rapidly for some years and
then slow down to a more normal growth rate. It is most applicable for small and
medium company as sometime the businesses will use their earnings for expansion
purpose and hence reduce the dividend payout. (Eg: Genting)

4. Assume two investors are valuing Stock A and have agreed to use constant growth model. Both
use $3 a share as the current dividend for the current year. Are these two investors likely to
derive different prices? Why or why not?
These two investors will derive different prices as they might use different estimation of
expected growth rate in dividend by either using (1-Dividend Payout Ratio) x ROE, average
historical earnings growth rate or median industry earning growth rate. A high growth rate
results higher price whereas low growth rate causes a lower stock price.

Also, they are likely to use different required rate of return, a higher required rate of return will
result a lower stock price whereas low required rate of return results higher stock price.

Vo =D1/(r-g)

5. McCalla Food Distributors is currently paying a dividend of $1.80. This dividend is expected
to growth at a rate of 6 percent in the future. McCalla is 10 percent less risky than the market
as a whole. The market risk premium is 7% , and the risk free rate is 5%. What is the estimated
price of this stock?
Beta = 0.90 (the stock is 10 percent less risky than the market)
Expected return
= risk free rate + Beta (risk premium)
= 0.05 + 0.90(0.07)
= 0.113/ 11.3%
Estimated price of stock,
D (1+ g)
P0 =
r−g
1.8 (1+ 0.06)
=
0.113−0.06
= $36

6. Stock A: Current Dividend = $3. No change in future. Required return = 30%

 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
Stock B: Current Dividend = $3. Constant growth at 8%. Required return = 16%
Stock C: Current Dividend = $1.48. Growth at the rate of 18% for 3 years, 7% thereafter.
Required return = 20%

Stock A = zero growth rate model

V0 = Do/r
V0= $3 / 30% = $10

Stock B = constant growth model

V0 = Do( 1+g) / r - g
V0= $3(1+8%) / 16% - 8% = $40.5

Stock C = multi-stage growth model

$1.48 (1+18%) = $1.7464 = $1.75

$1.48 (1+18%)^2 = $2.060752 = $2.06
$1.48(1+18%)^3 = $2.43
$1.48(1+18%)^3*(1+0.07) = $2.60

V3= $2.60 / ( 20% -7% ) = $20

V0 =( $ 1.75 / (1+20%) ) + ( $ 2.06 / (1+20%)^2 ) + ( $2.43 / (1+20%)^3) ) +
( $20 / (1+ 20% )^3 ) = $15.87

i. If the current price for Stock A, B and C is $11, $30 and $17 respectively, which stock
you will choose to invest?
I will choose stock B because the stock B is undervalued stock. The market value is <
than the intrinsic value ( $30 < $40.5 )

ii. If the current price for Stock A, B and C is $5, $45.50 and $10.87 respectively, which
stock you will choose to invest? Why?
I will choose stock A and stock C because stock A and stock C are undervalued stock.
The market value of stock A is < than the intrinsic value ( $5 < $10). The market value
of stock C is < than the intrinsic value ( $10.87 < $15.87)

BBMF 2063 Investment and Financial Analysis Semester 1 (2020/2021) Tutorial 7

True and False

1. Technical analysis utilizes a top-down approach to common stocks. ( X )
 2. A bar chart is the simplest type of chart used in technical analysis. ( √ )
3. Technical analysis uses P/E ratio. ( √ )

Essay Question

1. Differentiate between fundamental analysis and technical analysis.

Fundamental analysis evaluates stocks by attempting to measure their intrinsic value.
Fundamental analysts study everything from the overall economy and industry conditions to the
financial strength and management of individual companies. Earnings, expenses, assets and
liabilities all come under scrutiny by fundamental analysts.
Technical analysis differs from fundamental analysis, in that traders’ attempt to identify
opportunities by looking at statistical trends, such as movements in a stock's price and volume.
The core assumption is that all known fundamentals are factored into price, thus there is no
need to pay close attention to them. Technical analysts do not attempt to measure a security's
intrinsic value. Instead, they use stock charts to identify patterns and trends that suggest what a
stock will do in the future.

2. Using a moving average, how is a sell signal generated?

A sell signal is generated when the shares price falls below its moving average.

When prices and MA are on the uptrend, if prices suddenly increase in a very fast rate and far
apart from MA indicates over bought. Share price may fall toward MA, this is a short term
selling signal.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)

3. What is relative strength analysis?

 Relative strength is a technique used in momentum investing and identifying value stocks. It
consists of investing in securities that have performed well, relative to their market or
benchmark.

4. Ah Beng Berhad one week candlestick chart

i. Fill in the information based on the above chart (note: Shaded candlestick represent red
candlestick and unshaded represent green candlestick) :
Monday Tuesday Wednesday Thursday Friday
High 9 8.50 9 9 9
Open 8.50 8.50 8.50 8.25 8.50
Close 8.25 8.25 8.75 8.50 8.50
Low 8 8 8.50 8 8
SMA 3 8.42 8.50 8.58

ii. Calculate three-day moving average by using closed price.

5. Distinguish between a bar chart and a point-and-figure chart.

6. Briefly explain what behavioural finance is. Why it is important?

Behavioural finance is use to study how emotional, cognitive, and psychological factors
influence investment decisions. It helps to explain the difference between expectations of
rational, efficient investor and actual behaviour. Behavioural finance also focuses on the fact
that investors are not always rational, are influenced by their own biases and have limits to their
self-control. Incorporating behavioural finance into their practice is the key to enhancing the
client experience, retaining clients, deepening relationships and potentially delivering better
outcomes.

7. Explain the following investor’s behaviour and its possible consequences.

 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
i. Overconfidence
- Overconfidence is a bias in which investors have too much faith in the precision of
their estimates, causing investors to underestimate the range of possibilities that
actually exist. It results the investors to underestimate the extent of possible losses and
therefore underestimate investment risk. Overconfidence also comes from the tendency
to attribute good results to good investor decisions and bad results to bad luck or bad
markets.

ii. Representativeness
- Representativeness is decision making based on stereotypes, characterizations that are
treated as “representative” of all members of a group. In investing, representativeness
is a tendency to be more optimistic about investments that have performed well lately
and more pessimistic about investments that have performed poorly. As a result,
investors may put too much emphasis on past performance and not enough on future
prospects.

iii. Herding
Herd instinct in finance is the phenomenon where investors follow what they perceive
other investors are doing, rather than their own analysis. In other words, an investor
exhibiting herd instinct will gravitate toward the same or similar investments based
almost solely on the fact that many others are buying the securities. Also, the herding
instincts of investors may made them anxious to pursue the next initial public offering
(IPO) while completely overlooking traditional fundamentals of investing.
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
Tutorial 29

True and False

1.
Both stocks and bonds are valued by summing the discounted future flows of interest (or
dividends), and the repayment of principal (or sale of the stock). ( )
2. Bond traders use the term “basis point” to mean one percentage point in interest rate. ( )
3. One of the most cost-effective methods of passive bond investing is buying into a bond mutual
fund. ( )
4. One of the major benefits of employing a buy and hold strategy is the savings on trading costs.
( )

Essay Question

1. Bond A and Bond B pay annual coupon rate of 10 %, with a face value of $1000 and three
years to maturity.
i. Assume annual YTM is 12% and the market price is $900, is Bond A worth to buy?
ii. If Bond B currently selling at $750, what is the YTM?
iii. Repeat question (i) and (ii) if both bond pay semi annually

2. You need $60,000 five years from now to pay the down payment for your house. You buy 30
bonds at face value of $1000 with five years maturities yielding 8.2. Will you have enough to
meet your goal at the end of five years? If no, suggest some solutions.

3. Immunization is intended to protect a portfolio against interest rate risk. What should be done?
How does it work?

4. Sam Stevans is the trustee for the Hole Punchers Labour Union (HPLU). He has approached the
investment management firm of IM Associates (IMA) to manage its $200 million bond
portfolio. IMA assigned Carol Peters as the portfolio manager for the HPLU account. In their
first meeting, Mr. Stevans told Ms. Peters: “We are an extremely conservative pension fund. We
believe in investing only in investment grade bonds so that there will be minimal risk that the
principal invested will be lost. We want at least 40% of the portfolio to be held in bonds that
will mature within next three years. I would like your thoughts on this proposed structure for
the portfolio.”
How should Ms. Peters respond?

Investors in futures can take either a long, short, or neutral position. ( )

2. A pension fund holds $10 million in Treasury bonds. In order to protect against a rise in
interest rate, the pension fund should use a short hedge in T-bond futures. ( )
3. In a margin account, if the account balance falls below the initial margin, a margin call is
triggered. ( )
4. Most futures contracts are settled by delivery. ( )
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
Tutorial 30

True and False

1.
Essay Question

1. What does it mean to say that futures trading is a zero-sum game?

2. Which type of risk does stock index futures allow investor to hedge?

3. Consider the Japanese yen futures contract with following specifications:

Contract size: ¥12,500,000
Exchange rate: $0.00989/¥
Initial margin: $3,465
Maintenance margin: $3,150
Expiration date: Sept 2014

i. How much must the speculator initially pay?

ii. If the futures price of Yen rises to $0.01/¥, what are the profit/ loss on the short
position?
iii. If the futures price of Yen declines to $0.00972/¥, what are the profit/ loss on the short
position?

4. Mr. Lee has a portfolio of stock valued at RM900,000. He would like to protect against an
anticipated market decline.
i. Suggest and explain a solution to Mr. Lee
ii. Mr. Lee anticipated that the market will decline 10%. Assume FBM KLCI stock index
future priced at 1,800. Explain how stock index future able to hedge against the
market decline.

5. Suppose an investor purchases a call option on a Treasury bond futures contract with a strike
price of $91 and a premium of $1.
i. If at the expiration date the price of the Treasury bond future contract is $96, will the
investor exercise the call option; if so, what will the investor and the writer of call
option receive?
ii. If at the expiration date the price of the Treasury bond future contract is $89, will the
investor exercise the call option; if so, what will the investor and the writer of call
option receive?

If the price of the underlying stock equals the strike price of the call option at maturity, the call
buyer has a breakeven transaction. ( )
2. If the price of the underlying common stock is less than the exercise price of a call, it is in the
money. ( )
3. There is a positive relationship between the price of a put option and the volatility of the
underlying common stock. ( )
 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)
Tutorial 31

True and False

1.
Essay Question

1. Stock ABC selling at $140 per share in the market, paying dividend of $3 per share, expect to
growth at 5% for next three years, and a constant growth of 3% thereafter. The beta of Stock
ABC is 2.0, Treasury bill paying 3% and the market portfolio return is 4%.
i. Calculate intrinsic value of Stock ABC by using Dividend Discount Model (DDM).
ii. Assume you have limited fund, is there any way to amplify the outcome? Explain how
it works based on the answer in Question 1(i).
iii. Given the call option premium of Stock ABC is $9 per share and the exercise price is
$140, calculate the profit earned by using traditional long position and buying call
option by investing $280,000 respectively.
iv. Assume you are the shareholder of this company; is there anywhere to reduce the risk
exposure? Explain by using graph.

2. Suppose you are a FTSE Bursa Malaysia KLCI (FBM KLCI) Option trader and the FBM KLCI is
currently at 1,660 points. The following quotes are available to you: -
30 days FBM KLCI Option: -
Call Option Put Option
1,640 Call @ 29 points 1,640 Put @ 3 points
1,660 Call @ 3 points 1,660 Put @ 5 points
1,680 Call @ 2 points 1,680 Put @ 31 points
Option Contract size: FBM KLCI multiplied by RM100

Required:

a) Construct the payoff diagram of buying the In-the-Money Put Option indicating its breakeven
price and maximum profit and loss.

b) Construct the payoff diagram of selling the Out-of-the-Money Call Option indicating its breakeven
price and maximum profit and loss.

c) Compute the intrinsic value and time value of the In-the-Money Call Option

d) Suppose you expect that the local stock market will rise drastically in the near future, what can
you do to take advantage of your expectation given that you have sufficient money to purchase
FIFTY (50) Out-of-the-Money options?

e) Based on your strategy in part d) above, indicate whether you will exercise the option and compute
your payoff if, at maturity of the option: -

i) FBM KLCI drops to 1,670

ii) FBM KLCI rises to 1,700

 BBMF 2063 Investment and Financial Analysis
Semester 1 (2020/2021)

True and False

Tutorial 11

1. Real estate investment always associated with low liquidity and high transaction cost. ( )
2. House can act as a shelter as well as a financial asset. ( )
3. Mortgage REIT is the owner of the property. ( )
4. An equity trust is a REIT that specializes in mortgage loans. ( )

Essay Question

1. Why is real estate an attractive investment?

2. Real property can be purchase by leverage from bank, but still not attractive for certain
investor.
Why?

3. Assume you bought a house by using leverage:

i. Buying Price: $700,000
ii. Legal fees: $30,000
iii. Margin of financing: 90% iv. Tenure and interest rate: 30 years at 4.6%

Calculate the following questions:

i. Upfront Cost
ii. Monthly instalment
iii. Assume you rent out the house at $2100 per month and sell the house end of 5th year
at $800,000, with agent fees of 2%. Calculate net present value (NPV) if discounting
factor is 5%. Comment on the calculated NPV.

4. What are the factors that need to consider when purchasing a residential property?

5. What advantages do equity REITs offer investors over direct investments in real estate
properties?