[Solved] Financial Instruments and Markets

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[Solved] Financial Instruments and Markets

Group Project S1 2016

Financial Instruments and Markets

This project will further your understanding of how financial markets work and allow you to develop an insight into the pricing of financial instruments (and the factors which may cause prices to change). By working in a group you will be able to actively discuss the issues surrounding the assigned questions.

Part A of the assignment focuses on equity markets. Part B of the assignment focuses on ethics. In order to successfully complete this project you will utilize the theory studied in class, information provided on Blackboard, and other appropriate resources (such as Bloomberg). Part C is a mandatory Bloomberg component.

Part A – Equity Markets

1. In November 2015, Santos (STO) announced an issue of new ordinary shares valued at $2.5 billion. Explain the effect that this issue should have on the share price in theory. Carefully evaluate whether the actual effect of the issue matches your expectations based on the theoretical effect, and provide an explanation if there is a difference. You should include a chart which clearly shows this event. [10 marks]

2. What is the current price of ordinary common shares in Fortescue Metal Group (FMG)? Using an appropriate chart, describe how has this price evolved over the past 5-years, and compare to an appropriate index. What, in your opinion, has been the main driver for this share price movement? Using an appropriate ratio, evaluate whether FMG is currently over/under-valued.                                           [10 marks]

3. Use the chart created in question 2, and the technical analysis tools introduced in lecture 4, to predict where the share price of Fortescue Metals Group will be at the end of 2016. What would your recommendation be with regards buying or selling these shares right now? What does your recommendation mean for the concept of market efficiency?                                                                             [10 marks]

4. The final task in this section requires you to make an investment decision based on the theoretical value of a firm. This requires you to complete several steps:
   1. Undertake a brief industry and company analysis,
   2. Select the most appropriate present value model and derive a theoretical price for the share,
   3. Determine whether you would invest in the company’s ordinary shares.

The company you will consider investing in is Woodside Petroleum (WPL). You should assume that the equity market risk premium is 5%, and the risk free rate is equal to the RBA cash rate at the time of your analysis.

[20 marks]

Part B – Ethics

1. In 2015, it was revealed that Volkswagen (VW) had installed software on its diesel cars in order to circumvent US emissions tests. Carefully, outline what this scandal involved, and explain why the actions of the VW management were unethical. Discuss what issues may have caused this behavior to occur, and what you would do to prevent this from happening in the future. Evaluate the impact of this scandal on the value of VW, and explain why the value of the firm may change by more than the cost of the recall to correct the issue. [20 marks]

Total: 70 marks

Part C – Bloomberg

Completing the Bloomberg Essentials Training Program is a compulsory requirement for all students in this unit. Each student should successfully complete the core and at least one of the market sectors exams – this should take 3-4 hours. Evidence, in the form of a screen print, or certificate, should be included in your assignment submission. Groups not fulfilling this criterion will be awarded a mark of zero.

Additional Information: All information required for this assessment is available via Bloomberg, and all charts provided in your submission should come from Bloomberg. Further information on this training is available on Blackboard. Any data or chart that is not sourced from Bloomberg will attract a 5% penalty (per item).

You may find the following websites useful:

• Bloomberg – bloomberg.com
• Yahoo! Finance – finance.yahoo.com
• Australian Securities Exchange – asx.com.au
• Reserve Bank of Australia – rba.gov.au
• Commonwealth Bank of Australia – commbank.com.au

Assignment Format:

Students are required to form groups of 4 undergraduates or 3 masters students. Groups should consist of only undergraduate or only masters students. Students should find a group and hand in a completed sign-up form (see Blackboard) prior to the lecture in week 3. If you do not hand in the form, you will be randomly assigned a group and be required to submit a sign-up form prior to the first mid-semester break. Once assigned, the groups cannot be changed. It is not possible to submit the assignment as an individual.

The information covered during the first six (6) lectures, as well as information posted on Blackboard, and other resources you have access to, should be used to answer the questions thoroughly.  Students should include charts / diagrams where appropriate – remember the adage that “a picture is worth a thousand words”!

An electronic copy of your assignment should be submitted via the turnitin function on Blackboard. I would also remind you of your obligations under the University rules on academic integrity; if you are unsure of your responsibilities then please check the relevant section of the Curtin website: http://academicintegrity.curtin.edu.au/

You are also required to submit a hard-copy of your assignment. The submission date for the assignment is the start of the lecture in week 11. As stated in the course outline, late submissions will not be accepted and will be awarded a score of zero. The assignment will be assessed by the lecturer according to the criteria contained in the cover sheet available on Blackboard.

Formatting requirements:

• Maximum of 10 sides of A4 (including tables, diagrams and appendices)
• Font size ≥ 11
• Line-spacing 1.5
• The hard-copy you submit should be printed double-sided. You should use staples to hold this hard-copy together.
• Do NOT use any binding or plastic folders.
• Ensure you attach the assessment cover sheet as a front page to your assignment.

Learning outcomes associated with assignment:

1. Compare the types of equity securities that companies can use to raise equity capital, and understand how share prices are determined.
2. Interpret international financial economic theories in relation to financial instruments and markets, including the effect on calculation of financial instrument prices.
3. Ethics