TMA 01 contributes 25 per cent to the total marks available for continuous assessment on BB831. No specific word limits will be applied to some of the questions in this TMA. However, when you are allocating your word count, you should take account of the marks available for each question. Please answer all questions.
Question 1 (30 marks)
Assume it is 1 January 2017. A UK based investor has researched two possible bond investments, but an intermittent printer fault has caused some important information to be missing from the printout. The latest coupon on each bond has just been paid. Each bond has a face, or par, value of £1000. The investor assumes that each bond pays coupons annually.
|Bond||Coupon rate||Maturity||Current price||Yield to maturity|
|ABC||6.50%||31 December 2022||?||5.50%|
|XYZ||4.45%||31 December 2024||£838.45||?|
- i.Complete the table by calculating the current price of bond ABC (4 marks) and yield to maturity of bond XYZ (6 marks).
- ii.The investor subsequently realises that the printer had not detailed the fact that the ABC bond makes semi-annual coupon payments. Recalculate the current price of the ABC bond. (6 marks)
Holefoods plc, a UK based company wants to invest £1,500,000 for a three-year period. Inflation is currently 1.5% per annum and is expected to remain at this rate for the foreseeable future. The choice is between two possible investments. Over recent years, the frequency distribution of the actual returns achieved by the two investments has been observed, but there is no information available about the correlation between the two investments.
|Annual rate of return||Probability|
|Annual rate of return||Probability|
i.Calculate the expected rate of return and the standard deviation of the expected return for each of the investments. (6 marks)
ii.Advise Holefoods how to choose between the two investments. Should Holefoods give any consideration to splitting their investment between the two investments? Justify your recommendation. (8 marks)
Question 2 (40 marks)
In this question you are required to estimate the weighted average cost of capital (WACC) for India based paint manufacturing company, Asian Paints Ltd (stock ticker on NSE: ASIANPAINT) at its financial year ended 31 Mar 2019. All data in Indian rupees (INR, ?).
The following balance sheet information on ASIANPAINT is available:
|Balance Sheet||Year ending 31 Mar 2019 (? Crores)||Year ending 31 Mar 2018 (? Crores)|
|Total shareholder funds||9519.7||8410.2|
|Total long term borrowings||19.5||28.3|
|Total short term borrowings||596.5||492.4|
The following profit and loss information on ASIANPAINT is available:
|Profit and Loss||Year ending 31 Mar 2019 (? Crores)||Year ending 31 Mar 2018 (? Crores)|
For estimating the WACC, you need to compute the following:
- Cost of equity for ASIANPAINT using both CAPM and the Gordon Dividend Discount Model. (10 marks)
- Cost of debt for ASIANPAINT using the balance sheet and P&L information given above. (10 marks)
- The capital structure of WACC using the balance sheet and P&L information given above. (10 marks)
- Estimating the WACC using the above information. You may take the tax rate to be 30%. (10 marks)
Further, the following information is available for computing the cost of equity:
For CAPM, you may refer to the share price and NIFTY50 index data (in INR, ?) for one year from 1 Apr 2018 to 31 Mar 2019 (attached with this document) for computing the Beta. Necessary adjustment in the beta would be required to get a better estimate of the cost of equity.
Consider Rf = 6%, equity risk premium = 4%.
For DVM, the following dividend data is available:
|Dividend Year||Dividend per share (?)|
You may consider five year growth rate of dividends.
Finally for estimating the cost of equity, you may take the higher of the two returns obtained from CAPM and DVM.
Question 3: The Nirav Modi-PNB Scam (30 marks)
On 29th Jan,2018, PNB (Punjab National Bank), an India based public sector bank, filed a criminal complaint with India`s federal investigative agency against three companies and four people, including billionaire jeweller Nirav Modi and his uncle Mehul Choksi, the managing director of Gitanjali Gems, saying they had defrauded PNB and caused a loss of ?280cr ($43 million).
In a regulatory filing on Feb. 14, the bank updated the sum involved in the fraud to ?11,400cr ($1.77 billion), which it said was determined after further investigation at its Mumbai city’s Brady branch.
The fraud which began with regular business transactions in LOUs (letter of undertaking) by Mr. Nirav Modi in year 2011 remained undetected for seven years until it had magnified to this humongous amount when it was finally unearthed. It is believed that Nirav Modi was ‘helped’ by the staff at the PNB’s Brady Branch. Neither the top management at PNB, nor the Reserve Bank of India (RBI), the central bank of India apparently had a clue as to what kind of fraudulent transactions were going on in the bank branch of the biggest metro city of India.
With the context of the PNB scam briefly described above, explain how agency problems can arise in the banking and financial services industry and how effective corporate governance rules and codes are in trying to regulate such agency problems.
In answering the question, you must briefly define both Agency Theory and Corporate Governance (10 marks). Then you can focus on the PNB scam, its mechanism and the role of the management of the branch and of the PNB’s top management in perpetrating the scam (7 marks). You can then draw conclusions from your research on the agency and corporate governance related issues in the banking industry and some of the measures the RBI, the Government of India and the banks may take in ensuring such scams do not happen in the future (8 marks). Word limit: 700 words, document should have appropriate referencing and should be free from plagiarism (5 marks)
Penalty for late submission:
- Submission within 6 working days:
10% reduction for each day late down to the 40% passing mark and no further.
- Submission that is late by 7 or more days: submission will be refused, mark of 0.