ECOM057 Asset Management Mid term Sample exam
Question 1 (20 marks)
In real world, multiples are extensively used in asset valuation. In your perspective what are (i) the major strengths and (ii) potential sources of errors associated with the use of multiples in valuation exercises? Explain your answer.
Question 2 (40 marks) 资产管理期中代考
Consider the three Fama French factor model for the expected return of stock i, with risk factors given by: (Rm-Rf), the market risk factor, SMB, the size factor and HML, the book value factor. Assume that using data from the last 6 months those risk factors are as follow: (Rm – Rf) = 8.52; SMB = -1.2; HML = 3.0.
Assume that, for stocks A and B, running the model regression for the same period of time, obtained betas for different risk factors are as disclosed in Table 1:
Table 1
| βiM
(beta market risk factor) |
βiSMB
(beta size factor) |
βiHML
(beta book value factor) |
|
| Stock A | 1.2 | -0.7 | -0.5 |
| Stock B | 0.6 | 2.5 | 2.5 |
a) What is the expected excess return of stock A and B, and how is it decomposed by risk factor? (present your answer with one decimal. For example, 12.38% is 12.4%). Explain your answer. [15 marks]
b) Using only this data, how do you describe the risk profile of assets A and B? Explain your answer. [10 marks]
c) Factor models such those of Fama French are named “proxy models”. Can you give an intuition for this? Explain your answer. [15 marks]
Question 3 (40 marks) 资产管理期中代考
You are an asset manager valuing Company HZX to eventually buy it to your equity portfolio. After collecting information, you estimated the following free cash flow to the firm (FCF) for the period between 2015 and 2019:
| Year 2015 | Year 2016 | Year 2017 | Year 2018 | Year 2019 |
| € 2.500 | € 2.568 | € 2.529 | € 2.605 | € 2.670 |
Additionally further assumptions and information is as follows:
Tax rate: 30%
Reference average risk free interest rate: 1.75%
Target capital structure given by Debt/(Debt+Equity) ratio: 45%
Expected average debt spread charged to this company: 3.5%
Reference Equity Risk premium: 6%;
Equity Beta: 1.5;
Expected nominal growth of FCCF in perpetuity: 2.2%.
a) Considering the Capital Asset Pricing Model (CAPM) and the target capital structure of HZX, calculate the appropriate rate of discount of estimated FCF. Explain your answer. (present your answer with two decimals. For example, 12.328% is 12.33%) [20 marks]
b) Assuming the company has no expected life limit. What is the terminal value of HZX? Explain your answer, also giving an intuition about what is the terminal value. [20 marks]
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