King’s Business School, King’s College London

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Coursework Assignment

Assessment Format: 7QQMM203 Coursework 2020/1
Module code and title: 7QQMM203 Principles of Finance
Coursework Release Date: 10:00 GMT on 22nd February 2021
Coursework Deadline Date: 10:00 GMT 25th February 2021

Instructions:

The candidate must choose one question (out of the two) and attempt all
its sub questions.

Word count: Students should not exceed more than 1500 words for this
paper.

INSTRUCTIONS TO CANDIDATES:
1. A template answer sheet has been provided on the KEATS page, you
should complete the cover sheet and then write your answer to the
question below.
2. Use the Harvard referencing style.
3. If you have a PAA cover sheet, you should include this in addition to
the template answer sheet
4. Save your work regularly, at least every 15 minutes.

ONLINE SUBMISSION INSTRUCTIONS:
1. Your answer sheet should be submitted via the Turnitin submission
link on the module KEATS page.
2. Ensure your document is submitted through Turnitin with the title
CANDIDATE ID – MODULE CODE- e.g. AB12345-7QQMM203
3. Once submitted please check you are satisfied with the uploaded
document via the submission link.
4. If you experience technical difficulties uploading your assessment to
KEATS please email a copy to msceconfinance@kcl.ac.uk with the
subject of the email as CANDIDATE ID- MODULE CODE- COURSEWORK
ASSESSMENT. You should attach supporting evidence of technical
issues where possible.

King’s Business School, King’s College London

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Question 1

a. Give the fair price of a bond paying a coupon C each year, with a face value
of F. Discuss. Under what condition would you buy the bond? Discuss.
(30 marks)

b. Show that the price of a stock may be seen as the discounted value of the
stream of future dividends. Give the formula for the price of a stock (1) if
dividends are expected to be constant through time, and (2) that if dividends
grow at a constant rate, g. If you had only these two assets, how would you
compose your portfolio? Discuss. (40 marks)

c. The current price of stock A is £90. You know that this stock pays £10 as
dividend every year, and that dividends are going to be constant. The default
probability of the firm is zero. The discount rate is 9 percent.
c.1. Is it worth to buy the stock? Discuss. (10 marks)

c.2. Assume that stock B is also available. The price is £80. The default
probability of this firm is zero. Stock B is expected to pay £9 as dividends
every year. How would you compose your portfolio.
(10 marks)

c.3. At which discount rate the stock A is not worth to buy? How does
your answer change if dividends are expected to grow at 1 percent per
annum forever? And what if they are expected to decline at 1 percent
per annum forever? Discuss. (10 marks)

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King’s Business School, King’s College London

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Question 2

a. What are the mechanisms through which financial markets and institutions
enhance the economic growth. Discuss. (25 marks)

b. There are many individuals involved in financial transactions. What is the
most vulnerable category and why? Discuss. What protection mechanisms
does the financial system provide? Discuss. (25 marks)

c. In the paper Levine, R., Loayza, N., Beck, T., 2000. Financial
intermediation and growth: Causality and causes. Journal of Monetary
Economics 46, pp 31-77, the authors study the link between financial
markets and economic growth.

c.1. What are the factors which determine a well-functioning financial
system? How are they linked to economic growth? Discuss. (25 marks)

c.2. Discuss the technical issues related to the research question?
Explain how the authors address these technicalities. (25 marks)

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