What is corporate governance and financial system
Question 1: Corporate Governance and Financial System
Jason’s grandfather gave him some shares as gifts when he graduated. One of these shares is Commonwealth Bank of Australia (CBA.AX). Jason read some news headlines about CBA’s recent scandal and come across phrases like ‘corporate governance’ and ‘money laundering’. Compose a short essay to address the below issues (within the word limit).
a. Briefly explain CBA’s recent scandal, including what happened, how the authority, CBA management and investors responded to the scandal, and etc. (200 – 300 words)
Question 2:
Valuation of Equity and Debt
Jason’s father, James, is actively trading in the financial markets. Today, his broker gave him three investment recommendations and quotes (market price).
Security 1: Commercial Paper
It has face value of $100,000 with a maturity of 219 days. Currently, it is trading at $97,000.00.
Security 2: Corporate Bond
It has face value of $100,000 with 6% p.a. coupon. Coupon is paid quarterly. Last coupon was paid yesterday. The bond will be mature in five years. Currently, it is trading at $92,500.00.
Security 3: Common Share
The underlying company pays dividend annually. A $2 dividend was paid yesterday. As per the market consensus, the company’s dividend will grow by 10% p.a. in the first five years, then the dividend growth rate will drop to 3% and becomes constant till infinity. Currently, it is trading at $33.5. The broker can offer up to 3,000 shares.
James’ required rate of returns on these three securities are as below.
Security
Required Rate of Return
Commercial Paper 4.5%
Corporate Bond 8.0%
Common Share 11.0%
a. Which security or securities should James purchase? Assume he has sufficient funds to complete all three transactions.
b. Suppose, accidentally, James bought all three securities (one commercial paper, one corporate bond and 3,000 common shares) at the priced quoted by the broker. In one month, the prices of these securities are as below. How much is James’ annualized return, assuming compounding interest?
Security
Market Price
Commercial Paper 97,400
Corporate Bond 92,000
Common Share 34.50
Answer preview:
Word: 788