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FIN4010EF Financial Management (Assignment 1) Essay

This is an individual continuous assessment that carries 15% of the overall assessment in this course. You are required to answer ALL questions below. Notes:
1. Deadline of submission is 16 October 2013. (***No Extension will be granted except extenuating circumstances can be shown). 5 marks will be deducted for every one day delay of submission. 2. Plagiarism will be penalized in according to the standing regulations of the Open University of Hong Kong.

Question 1
Mark Sexton and Todd Story, the owners of S&S Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into discussion with Kim McKenzie, an underwriter from the firm of Raines and Warren, about which bond features S&S Air should consider and what coupon rate the issue will likely have.

Although Chris is aware of the bond features, he is uncertain about the costs and benefits of some features, so he isn’t sure how each feature would affect the coupon rate of the bond issue. You are Kim’s assistant, and she has asked you to prepare a memo to Chris describing the effect

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of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature:

1. The security of the bond – that is, whether the bond has collateral. (5 marks) 2. The seniority of the bond. (3 marks)
3. The presence of sinking fund. (4 marks)
4. A call provision with specified call dates and call prices. (4 marks) 5. A deferred call accompanying the call provision. (6 marks) 6. A make-whole call provisions. (6 marks)

7. Any positive covenants. Also, discuss three possible positive covenants
S&S Air might consider. (7 marks) 8. Any negative covenants. Also, discuss three possible negative covenants S&S Air might consider. (7 marks) 9. A conversion feature (note that S&S Air is not a publicly traded company). (3 marks)

10. A floating-rate coupon. (2 marks)

You are also required to briefly introduce what is a bond before discussing the above various features that can be incorporated into the bond. (3 marks)

(50 marks)

Question 2
During a 5-year period, the relevant results for the market are that the risk free rate (rf) is 8 percent and the return on market (rm) is 14 percentage. For that period, the results of four portfolio managers are as follows:

Portfolio Manager
Average Return Made (%)

a) Calculate the expected rate of return for each portfolio manager and
compare the actual return with the expected returns. (9 marks)
b) Based upon your calculations, select the manager who is best performing. (4 marks)
c) What are the critical assumptions in the capital asset pricing model (CAPM)? (7 marks)
d) What are the implications of relaxing these assumptions?
(5 marks)

(25 marks)

(Total 75 marks)

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