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Assignment Solution
Assessment 2
Mind Your Own Business (MYOB)
Ticker Symbol – MYO
Question 1
    Question 1 Part a
    $ 1094120
    Question 1 part b
    $ 720.26 million
    Question 1 part c
    Loan C (EAR- 5.55%)
    Question 1 part d
    $ 12670.25
    Question 1 part e
    YTM = 5.36%
    Question 1 part f
    Coupon = $ 45
Excel Tables
    Question 1 Part a
     
     
     
    APR
    7%
    Periodic rate
    0.58%
    Time
    48
    payment
    26.2
    NPV
    1094.12
    Question 1 part b
     
     
     
    Revenue (in million)
    445.2
    Time (in years)
    5
    Growth rate
    10.10%
    Expected revenue
    720.26
    Question 1 part c
     
     
     
     
     
     
     
    Loan Type
    APR
    Period
    EAR
    Loan A
    5.45%
    monthly
    5.59%
    Loan B
    5.50%
    semi annual
    5.58%
    Loan C
    5.40%
    daily
    5.55%
    Question 1 part d
     
     
     
    Property Cost
    420000
    APR( quarterly)
    3.80%
    Period Rate
    0.95%
    Time (in years)
    10
    Time (In Quarters)
    40
    Payment
    $12,670.25
    Question 1 part e
     
     
     
    Face Value
    100
    Coupon Rate
    4.10%
    Coupon Payment
    4.1
    Time (In Years)
    8
    Price of Bond
    92
    YTM
    5.36%
Question 2
Part a
Answer –
Mind Your Own Business (MYOB) is an Australian company which helps businesses in taxation and accounting through their software services. The company also provides business management solutions to small and medium enterprises. The company was founded in 1991 in Australia by Christopher Lee. The current CEO of the company is Tim Reed
The company recorded a revenue of $445 million in 2018, which was a 7% increase when compared to 2017 revenue. 82% of the revenue was contributed by partners and clients segment, 15% by enterprise solutions, and 2% by payment solutions. Online subscribers increased by 57% from 2017 to 2018 to 628000 subscribers.
Given data
Risk free rate on April 05, 2019 = 1.90%
Beta = 1.04
Market Risk Premium = 6%
Using CAPM model to determine the expected return
Expected return = Risk free rate + beta*risk premium
Expected return of MYOB = 1.90% + 1.04*6% = 8.14%
    Question 2 part a
     
     
     
    Risk Free Rate
    1.90%
    Beta
    1.04
    Market Premium
    6%
    Expected Return
    8.1400%
Part b
Answer –
Hypothetical company beta = -0.2
Risk free rate = 1.90%
Market risk premium = 6%
Expected Return of hypothetical company = 1.90% -0.2*6% = 0.70%
Considering an investment portfolio made up of MYOB stock and the hypothetical company stock in equal weights:
Portfolio Beta = 0.5*1.04 + 0.5*(-0.2) = 0.42
Portfolio Return = 0.5*8.14% + 0.5*0.7% = 4.42%
    Question 2 part b
     
     
     
    Risk Free Rate
    1.90%
    Beta
    -0.2
    Market Premium
    6%
    Expected Return
    0.70%
     
     
    Portfolio Return
    4.42%
    Portfolio Beta
    0.42
Question 3
Answer –
The portfolio risk consists of two parts- systematic risk and unsystematic risk. These two risks comprises the total portfolio risk. Systematic risk is commonly known as beta. Systematic risk can be reduced through portfolio diversification, i.e. investing in one or more stocks to reduce the concentration risk of investing in a single stock. However the unsystematic risk cannot be reduced through diversification.
As shown in question 2, the portfolio beta was reduced significantly from 1.04 to 0.42 through diversification into two stocks.
Beta determines the volatility of a stock compared to the overall stock market. Beta value greater than 1 signifies that the stock is more volatile than market index and vice versa. A negative beta denotes an inverse relationship between stock and market returns.
The expected return of a stock is determined through the capital asset pricing model.
It is described as
Expected return = Rf +Beta*Market premium
Risk free rate is included in the CAPM equation because it is the rate that the investor can gain through safe investments. Market premium is the rate which an investor expects to gain while investing in the stock market and Beta signifies the level of risk that the investor is willing to take while investing in that particular stock.
As the portfolio risk decreases the expected return also decreases which can be observed from question 2. The MYOB stock return was 8.14% while the portfolio return was 4.42%. The expected return of the portfolio decreased because the portfolio beta decreased due to diversification in two stocks.
The above observation clearly shows the risk and return scenarios and how the risk can be reduced through portfolio diversification.