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SESS0039 Topics in Financial Management Dr Ilias Chondrogiannis
School of Slavonic and East European Studies
University College London
SESS0039: Topics in Financial Management 1 2023/24
Group Coursework
Deadline: 3pm Friday, 15th December 2023
Submission: Upload on Moodle using the relevant Turnitin link under the “Coursework material
and submission links” section.
Information about late penalties: Do not submit after this deadline, unless you have a SoRA or
approved EC extension that specifies a later date. Unauthorised late submissions will result in a
penalty being applied, as outlined in Section 10.9 of the SSEES Student Handbook. Penalties apply
from 3.01pm and are described in the “Penalties for late submissions” file on Moodle under the
“Course Guidelines and general material” section.
This is a GROUP assignment with a maximum of 5 people in a group unless otherwise discussed.
On the front page, provide only the student numbers and a statement of equal participation and
contribution. All group members will receive the same mark and there will be no leniency for
mistakes, late submissions, problematic communication etc, which are considered to be under the
full responsibility of students.
Any questions should be posted on the TFM 2 Teams group so that the answers are visible
to the entire cohort.
Your submission should be typed and formatted appropriately (use size 12 fonts and 1.5 line
spacing). The word limit of 2.000 words applies to net text, titles and any sub-headings (i.e. tables,
table notes, figures, figure notes, formulas, numbers, abstract, references, footnotes, page
numbers, appendices, cover pages are not included). You should attempt to solve all of the assigned
problems, provide detailed solutions, provide definite, unambiguous answers supported by clear
arguments and, most importantly, explain your methodology, solution and choices in full detail and
with all interim steps.
All explanations must be precise, accurate, well-argued and -phrased and demonstrate actual
knowledge and understanding of the subject and the methods, as opposed to copy-pasting material
and mechanical applications. For open-ended questions in particular, constructing or selecting a
method, identifying key parts and providing an unambiguous, well-argued answer are paramount.
Poorly presented or poorly explained submissions will be heavily penalized, and all graphs and text
must be computer generated. The use of Excel or other software in calculations is advised in order
to avoid unnecessary rounding errors. Do not round up numbers during the calculations but only in
the final result (2 decimals are fine in most cases unless otherwise stated). Finally, please refer to
the Assessment and Marking file on Moodle, available since the start of Term 1.
All sub-questions carry the same number of points unless otherwise specified. The points
of each question are denoted.
SESS0039 Topics in Financial Management Dr Ilias Chondrogiannis
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AI Guidance for the assignment (Category 2)
Students can use AI as a substitute of searching on the Internet. Appropriate uses include proof_x005f reading and language checking, and using AI to understand definitions, concepts and
methodologies. Inappropriate uses that result in immediate penalties include use the use of AI for
any part of the solution (including methodological suggestions of any kind or having AI decide
what the appropriate method is), summaries or literature surveys (especially if they are part of the
answer), ghost writing and drafting, mathematical processes, throwing the question in and seeing
what comes out. Students MUST follow UCL guidance on acknowledging use of AI and
referencing AI. The instructions here override the more general UCL guidance.
TL;DR: The use of AI to find resources, understand definitions and concepts and summarise a
body of knowledge is fine. The use of AI in any part of the answer (writing, solving, thinking,
deciding, arguing) is strictly out of limits.
SESS0039 Topics in Financial Management Dr Ilias Chondrogiannis
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QUESTION 1 (10 points)
(a) A 10-year Lithuanian bond has just been issued with an annualised yield of 4% and has a
quarterly coupon of 5% p.a. The face value is $1,000.
i) Can we infer whether the bond is trading above or below par without doing any calculations
Explain your answer.
ii) What is the bond’s duration in years If there is a 0.7% decrease in the yield, what is the actual
(realised) difference in the price and how much does that differ from what duration suggests
Why is there a difference
iii) Is a bond with a $1,000 face value, 15 years remaining till maturity, a 20% semi-annual coupon
rate and a 25% yield a preferable investment Explain. (3 points)
(b) Complete the following table using the information provided. All rates and coupons are (and
must be reported as) annual, all face values are 100 and today is Y0. You are working for a large
institutional investor. Another firm offers to lend your firm $1 million between years one and three
at a rate of 8.5%. Do you accept the offer (7 points)
Note: F(t1,t2) is the forward rate between time 1 and time 2 (interval is t2-t1). X denotes spaces that
must not be filled.
QUESTION 2 (10 points)
(a) A company wishes to create a trust fund through a savings plan with either annual or monthly
deposits under an APR of 5% over 30 years. During that time, the company has the following cash
flows: a 300.000 discount bond it holds matures in 15 years, an employment retirement scheme of
annual cost of 50.000 between the 10th and 30th year (20y duration) and raw material expenditure
of 30.000 at years 1, 3, 4, 7, 9 and 11. The company’s cash reserves are 500.000. The trust fund
will engage in charities over 20 years, starting immediately after the end of the savings plan. The
charity donations are annual, 230.000 each and will take place at the end of each year, i.e. the last
deposit for the savings plan takes place at the end of year 30 and the first donation at the end of
year 31. After 20 years, the trust fund is depleted and made redundant.
When is the company indifferent between the two savings schemes and what are the monthly/
annual payments at indifference (7 points)
SESS0039 Topics in Financial Management Dr Ilias Chondrogiannis
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(b) A company will pay a dividend of $10 per share today. This dividend is expected to grow at
12% per year for five years. Afterwards, no dividend will be paid for the next 3 years. After that
period, a dividend will be paid at the start of the year that is equal to the last dividend paid, and
payments will continue annually increased by 2%. If the yield of corporate bonds of the same
rating as the company is 7%, what is the current value of the share (3 points)
QUESTION 3 (10 points)
(a) You took out a 30-year mortgage (monthly payments) for ￡155,000 at 7.3% and payment
number 60 has just been paid today. You are deciding whether you should refinance the
outstanding principal by borrowing at today’s lower rate of 5.8% an amount that just pays off the
old loan. The new loan is for 30 years as of today. The total fees for getting the new loan equal
3.5% of the borrowed principal, and you will pay the fees today with funds from your savings
account.
i) How much would you save in terms of monthly payments if you refinance
ii) How much do you save in today’s terms
iii) How much must the rate of the new loan change to make refinancing undesirable Use 6+
decimals. (7 points)
(b) Consider three streams of cash flows payable at the start of the year. Stream 1 has the first
cash flow of $5,000 received in three years and future cash flows grow by 4% in perpetuity.
Stream 2 is a perpetuity of -$3,500 starting in two years. Stream 3 is a 4-year annuity of $4,000
starting in two years. Assume that the appropriate discount rate is 10%.
i) What is the present value of each stream
ii) Suppose that the three streams are combined into a single project, called 4. What is the IRR
of the project, and should the project be undertaken
iii) Without any calculations, how would your answer change if the annuity started today (3
points)
QUESTION 4 (20 points)
(a) Rivian has decided to invest in new automated driving tech and has announced a dividend cut.
It set annual dividends for the coming years to 10, 7, 5 and 3 USD but also stated that dividends
will grow at a rate of 3% forever (all amounts are per annum). How much should the price be if the
rate of return is 7%
(b) Maersk is assessing two alternative shipment tagging systems for its system of warehouses.
The fully automated option will cost 330,000 to install and will become obsolete after 6 years. The
semi-automated option is more expensive at 410,000 but will remain operational for 11 years. The
benefits of both systems can be considered evenly spread during their lifetimes. Maersk intends to
use own funds, currently deposited at 5.5% per annum. Which option is preferable
(c) Consider a stock with a current price of $45 per share. The market capitalization rate on similar
stocks is 11%. The dividend one year from now is expected to be $3 and the dividend two years
from now is expected to be $4. After that the dividend is expected to grow at a constant rate. What
is this constant dividend growth rate
SESS0039 Topics in Financial Management Dr Ilias Chondrogiannis
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(d) You are given the following information on the stock of Rio Tinto for next year by a group of
analysts.
Dividend yield: 1.37%
P/E ratio: 8.3
Stock price: 28 USD
Return forecast: 12%
(i) What are the expected Earnings Per Share ratio and the retention ratio
(ii) If the retention ratio and the EPS ratio remain unchanged, what is the return on equity
that justifies the current price What does this mean about expected earnings and
dividend growth
(iii) What amount of the price of the stock can be attributed to dividends and what to future
investment opportunities
QUESTION 5 (20 points)
Does the political cycle in Poland, defined by elections, affect the terms (cost) of government
borrowing Does the same outcome hold for the USA Explain the reasoning behind your
conclusion.
For Poland, please refer to the “Coursework Data” spreadsheet on Moodle. For USA data, please
use FRED, clearly denote what data you select and expand the period if you see fit. You are free
to use other reputable data sources, either open access or available via UCL, if you want to
expand on your answer, but this is not strictly required. This question requires the identification
and planning of an appropriate method, its correct application, good argumentation and own
research. The question is open-ended, there is no single “correct” answer and will be assessed on
the quality of argumentation, creativity, knowledge, and initiative. It can be answered based on
course material and its prerequisites. There are both econometric (parametric) and empirical (non parametric) ways to address the question, and students are welcome to explore either, but are
warned not to expand too much into unfamiliar territory especially regarding statistical
methodologies. It is very important to think about meaningful, practical ways to cover the issue, be
creative with the means and methods provided in the course/ question and apply reasonable and
insightful approaches. Students are encouraged to use academic literature to better understand
the subject, methodologies, stylized features etc and discuss and interpret their findings, but their
conclusions must be primarily based on their own analysis. A literature survey must be avoided at
all costs but using references to support the arguments is fine, if the students so wish.
QUESTION 6 (20 points)
(a) Consider the following tables for four EM equity funds priced in US dollars. You can also invest
in the MSCI EM index and in 1-year Treasury bonds whose yield is 5%. The table contains the
average target price 1 year from now predicted by analysts, the current price and the historical
return variance, price minimum and maximum during the last year.
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(i) Assume you can invest in only one fund. Which one would you prefer to hold in combination
with T-bills and why, based on all information given
(ii) Assume you can now invest in all funds and the risk-free asset. Construct 3 portfolia of 3, 4 and
5 assets each (“asset” includes the funds, the index and the bond). Justify your choice of assets in
each case and explain if and why any of those portfolia is more preferable than the previous
choice.
(b) Analysts have made the following predictions over the next 6 months.
(i) What is the expected return of each stock
(i) If β2 is greater than β1 by 0.3 and the CAPM holds, what is the market risk premium
(iii) If β1 = 1.5, find the risk-free rate and the expected return of the market.
(iv) After 6 months, the Central Bank cuts interest rates to 3% and the analysts update their
forecasts as follows.
In terms of diversifiable and non-diversifiable risk, which stock is now riskier and why Which
stock would you select
(c) You are working on a dataset with annual total returns, bond yields and retail prices on behalf
of Vanguard.
(i) Does past stock performance match future expectations, both in real and nominal terms What
is their volatility
(ii) Vanguard is assessing the performance of its well-known fund that follows the 60-40
portfolio allocation. What is the average risk premium and Sharpe ratio of the fund, if the fund
has an investment horizon of 10 years
(iii) Comment on the riskiness of each asset. How “risk-free” are bonds and bills, and why
SESS0039 Topics in Financial Management Dr Ilias Chondrogiannis
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QUESTION 7 (10 points)
Spotify wants to conduct what is known as sensitivity analysis for a new subscription scheme.
Sensitivity analysis involves the calculation of Net Present Value and Internal Rates of Return
under different scenaria about the inputs (amounts and parameters) of the project ceteris paribus,
i.e. simulating (calculating) NPV and IRR for different values of a selected variable. Users can pay
an extra subscription fee to have access to live-streamed gigs via the platform, and the company
wants to assess which price would be more suitable under different assumptions about users,
revenues and costs over a 5-year horizon. Cloud costs, tech infrastructure development etc
amount to 50 mil. USD of initial investment. Spotify expects 3 mil. subscribers in the first year and
estimate user growth at 10% for every year after Y1. The subscription fee is set to 7 USD, artist
royalties are 30% of annual revenues, administrative and management costs are fixed at 5 mil and
the wages of newly hired staff that will work on the scheme are 3 mil per year, increasing by 5%
per annum after Y1. All cash flows are nominal, annual and end-of-period, there is no depreciation
or inflation, the corporate tax rate in Sweden is 20% and the opportunity cost is 7%.
The company wants to assess NPV and IRR over a range of varying subscription fees and users
(i.e. these are the only two amounts that change in the sensitivity analysis). The range of fees is
from 3 to 15 USD while the range of subscribers is from 1 to 5 mil. Construct a table that reports
the NPV for different combinations of fees and subscribers ceteris paribus (you are free to select
the interval/ step) and another table for the IRR for the same combinations. Discuss the results
and whether the proposed subscription fee is an improvement over the company’s current
activities (Hint: look up Spotify’s Return on Equity).