The University of Manchester
BMAN23000 Foundations of Finance
Semester 2, 2012-2013
Please Read This Document Carefully
This document describes the coursework component for BMAN23000 which counts for 20% of the final mark for the course. You are required to complete this coursework in groups. You will be randomly allocated to a coursework group of approximately 6 fellow students in the same workshop. Details of coursework groups and companies allocated to each coursework group will be available on Blackboard (in a file called Group and Company Allocation). Details of the assignment are given below. The assignment will be discussed in detail in Workshop 1 in Week 4.
Each coursework group will be…show more content… Also briefly indicate how your advice would change if other assets became available to the investor.
The senior management of Company A employ you to advise them on the cost of capital the company should use to calculate net present value and decide whether or not to undertake a new investment project. You may assume that the new project is comparable to the average of the company’s existing projects in all respects.
Make sure you correctly identify which of your two companies is “Company A”. Note also that you were allocated randomly drawn and randomly paired companies. Therefore, Company B is probably not a useful comparable for Company A’s new project.
a) Calculate investors’ required returns on Company’s A’s equity. Remember, there are many ways of estimating investors’ required returns (see Lectures 1-2, Semester 2). You should use two alternative ways of calculating the required returns to check how sensitive your result is to using different methods; i.e. to check the robustness of your result. For example, you could use the Fama-French three-factor model in addition to the Security Market Line (SML), which uses a single factor (beta). See e.g. the article by Fama and French (1997) in the suggested readings below.
b) Calculate Company’s A’s debt cost of capital. The bond yield can be calculated as Yield = risk-free