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Tuesday, January 8, 2013

FINANCIAL MANAGEMENT (MGT201) ASSIGNMENT NO. 02 DUE DATE: 10TH JANUARY 2013



SEMESTER FALL 2012
FINANCIAL MANAGEMENT (MGT201)
ASSIGNMENT NO. 02
DUE DATE: 10TH JANUARY 2013 MARKS: 20
“Risk and Return – Stock Valuation”
Objectives:
_ To understand the analysis of risk and return for single stock investment.
_ To recognize the evaluation and application of common stock pricing and dividend growth models

Learning Outcomes:
After attempting this assignment, the students would be able to:
_ Understand the analysis of risk and return for single stock investment.
_ Recognize the evaluation and application of common stock pricing and dividend growth models

The Case:
Recently after graduating from Local Business College (LBC), you have started your own investment consultancy firm – Prudent Consultants (PC’s) to earn your livelihood. Mr. Zain, a regular investor approaches you to get some financial advice on different intended stocks. On the basis of his preliminary research, Zain is curious in reaping the risk and returns associated with these stocks. For your convenience, he has also brought necessary information regarding these stocks along with him:

_ MAQ Motors’ possible returns on investment of Rs.10,000 in common stock,
over the coming year is as follows:
Economic conditions Probability (p) Returns (r ) in Rupees
Recession 0.20 - 1, 000
Normal 0.60 1, 500
Boom 0.20 2, 500
_ Wahid Consultant Company, on its stock, is currently paying Rs. 2 per share as dividend, which is expected to grow at a constant rate of 7 percent per year.
_ Zahoor Company’s stock Y is expected to pay a dividend of Rs. 57; while, stock Z is expected to pay a dividend of Rs. 54 in the upcoming year. The expected growth rate of dividends for both stocks is 7%.
_ Ideal Contractors’ common stock (a very long term investment) is also
available. Mr. Zain’s required return on this investment (based on risk) is 25% (rCE). The present dividend offered by the Company is Rs 10; while, the par value of each stock is Rs 100.

Based on provided information:
a) You need to calculate the expected return, standard deviation of returns and coefficient of variations for MAQ Motors’ investment opportunity. [7 marks]
b) You are expected to analyze the price of Wahid Consultant Company’s stock in case Mr. Zain requires a rate of return of 16 percent to invest in this stock with this degree of riskiness. [4 marks]
c) You need to identify which stock of Zahoor Company has higher intrinsic value; in case, Mr. Zain wishes to earn a return of 9% on each stock.
[5 marks]
d) You are supposed to determine the dividend yield pricing for common stock of Ideal Contractors using both: ‘Zero Growth Pricing’ plus ‘Constant Growth Pricing’ Models (where: g=10%). Also compare & interpret the result. [4 marks]
(Show complete formulas, calculation and working as they carry marks)
IMPORTANT
24 hours extra / grace period after the due date is usually available to overcome
uploading difficulties. This extra time should only be used to meet the
emergencies and above mentioned due dates should always be treated as final
to avoid any inconvenience.
DEADLINE:
· Make sure to upload the solution file before the due date on VULMS.
· Any submission made via email after the due date will not be accepted.
FORMATTING GUIDELINES:
· Use the font style “Times New Roman” or “Arial” and font size “12”.
· It is advised to compose your document in MS-Word format.
· You may also compose your assignment in Open Office format.
· Use black and blue font colors only.
REFERENCING GUIDELINES:
· Use APA style for referencing and citation. For guidance search “APA
reference style” in Google and read various website containing
information for better understanding or visit
http://linguistics.byu.edu/faculty/henrichsenl/apa/APA01.html
RULES FOR MARKING
Please note that your assignment will not be graded or graded as Zero (0), if:
· It is submitted after the due date.
· The file you uploaded does not open or is corrupt.
· It is in any format other than MS-Word or Open Office; e.g. Excel,
PowerPoint, PDF etc.
· It is cheated or copied from other students, internet, books, journals etc.
Note related to load shedding: Please be proactive
Dear students!
As you know that Post Mid-Term semester activities have been
started and load shedding problem is also prevailing in our country
now a days. Keeping in view the fact, you all are advised to post your
activities as early as possible without waiting for the due date. For
your convenience; activity schedule has already been uploaded on
VULMS for the current semester, therefore no excuse will be
entertained after due date of assignments, quizzes or GDBs.


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IDEA SOLUTION AVAILABLE SOON



Hints For  Solution
Solution:
expected return = rp* = xA rA + xB rB
coefficient of variations = S.D / Expected return

Now, how can we put these values in the above given fomulas………




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a) You need to calculate the expected return, standard deviation of returns and
coefficient of variations for MAQ Motors’ investment opportunity. [7 marks]

expected return = rp* = xA rA + xB rB
coefficient of variations = S.D / Expected return


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Now, how can we put these values in the above given fomulas.........

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              a) You need to calculate the expected return, standard deviation of returns and 
coefficient of variations for MAQ Motors’ investment opportunity.
Solution of Part a
Expected ROR =<r>= ∑ Piri=12%,
Std Dev=σ = (∑(ri - < ri> ) 2 * Pi)0.5 = 11.66%
CV = σ / <r>= 0.97

b) You are expected to analyze the price of Wahid Consultant Company’s stock
in case Mr. Zain requires a rate of return of 16 percent to invest in this stock
with this degree of riskiness.
Solution of Part b
PV = Po* = DIV1 / (rce – g) = 22.22

c) You need to identify which stock of Zahoor Company has higher intrinsic
value; in case, Mr. Zain wishes to earn a return of 9% on each stock.
Solution of Part c
Stock Y: PV=Po* = DIV1 / (rce – g)= 2850
Stock Z: PV=Po* = DIV1 / (rce – g)= 2700

d)
You are supposed to determine the dividend yield pricing for common stock
of Ideal Contractors using both: ‘Zero Growth Pricing’ plus ‘Constant Growth
Pricing’ Models
(where: g=10%). Also compare & interpret the result.
Solution of Part d
Zero Growth Pricing: Po* = DIV1/rCE= 40
Constant Growth Pricing: Po* = DIV1/ (rCE – g)= 66.66
=------------------------------------------------------------------------------------------------------


                    

Formulas are :
1.The rate of return on an investment can be
calculated as follows:
 Return = (Amount received – amount invested ) / amount invested
2. standard deviation is the square root of variance. 
3. 
Coefficient of Variation:
= S.D. / Return;  or Risk / Return
Note: for students convenience virtualians team has prepared a presentation on the said topic, this presentation will be helpful in understanding the main theme of this assignment. plz study the attached file. 

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a) You need to calculate the expected return, standard deviation of returns and 
coefficient of variations for MAQ Motors’ investment opportunity. 
Solution of Part a
Expected ROR =<r>= ∑ Piri=12%,
Std Dev=σ = (∑(ri - < ri> ) 2 * Pi)0.5 = 11.66%
CV = σ / <r>= 0.97

b) You are expected to analyze the price of Wahid Consultant Company’s stock 
in case Mr. Zain requires a rate of return of 16 percent to invest in this stock 
with this degree of riskiness.

Solution of Part b
PV = Po* = DIV1 / (rce – g) = 22.22

c) You need to identify which stock of Zahoor Company has higher intrinsic 
value; in case, Mr. Zain wishes to earn a return of 9% on each stock.

Solution of Part c
Stock Y: PV=Po* = DIV1 / (rce – g)= 2850
Stock Z: PV=Po* = DIV1 / (rce – g)= 2700

d)
You are supposed to determine the dividend yield pricing for common stock

of Ideal Contractors using both: ‘Zero Growth Pricing’ plus ‘Constant Growth 
Pricing’ Models
(where: g=10%). Also compare & interpret the result.

Solution of Part d
Zero Growth Pricing: Po* = DIV1/rCE= 40 
Constant Growth Pricing: Po* = DIV1/ (rCE – g)= 66.66

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     Solution of Part a
=-1000/10000 =-10
=1500/10000 = 15
=2500/10000 = 25
Expected Return = p1r1 * p2r2 + p3r3
= 0.20 * -0.10 + 0.50 * 0.35 + 0.29 * 1.25
= (0.02) +0.09 - 0.05
= 0.15 * 100 = 15%
Expected Return = <r> = ∑ piri
Expected Return = P1 (r1) + P2 (r2) + P3 (r3)
Expected Return = 0.20(-1000) +0.60(1500) +0.20(2500)
                          = 12% ans.

Std Dev = δ = √ Σ (r i - < r i >) 2 p i.
= square root of {[(-10-12) power 2 (0.20)] + [(15-12) power 2 (0.60)] + [(25-12) power 2 (0.20)]}.
= square root of {96.8 + 5.4 + 33.8}
= square root of {136} = 11.66% ans.
Coefficient of variations for MAQ Motors’ investment opportunity:
CV = σ / <r>= 0.97
CV = Standard Deviation / Expected Return.
       = 11.66% /12 %
       = 0.97 ans.
Solution of Part b
PV = P0* = DIVI / (rCE –g)
Here,
 DIVI = 2, g = 7 %, rCE = 16%
  PV = P0* = 2/16% -7%
                   =2/0.09
                   =22.22 ans.
.
Solution of Part c
rCE = 9%
Y = Rs. 57 Div1
Z = Rs. 54 Div1
G = 7%
Stock Y: PV=Po* = DIV1 / (rce – g)
Y = 57 / 9% – 7%
  = 57 /2%
  = 57 / 0.02
  = 2850 ans.
Stock Z: PV=Po* = DIV1 / (rce – g)
Z = 54 / 9% - 7%
  = 54 / 2%
  = 54 / 0.02
  = 2700 ans.

 Solution of Part d

      Zero Growth Pricing: Po* = DIV1/rCE
                                            = 10 / 0.25
                                            = 40 ans.

Constant Growth Pricing: Po* = DIV1/ (rCE – g)
                                            = 10 / 0.25 – 10%
                                            = 10 / 0.15
                                              = 66.66 ans.

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15 comments:

  1. You can solve this assignmnet by studying lecture no 16, 17, 18 and 19. See examples and formulae on these lectures and you will find the solution.

    ReplyDelete
  2. I think, since expected return = rp*
    then expected return for recession will be:
    Recession= -1000x0.20
    i think, maybe?

    ReplyDelete
  3. apki bat bhi theek hy lkn formula to 2 values tk hy but data mn 3 values hn
    how can we solve........

    ReplyDelete
  4. wo age kahein use hoi ge i think

    ReplyDelete
  5. Expected return = ra xa + rb xb + rc xc
    0.20 x -1000 + 0.60 2500 + .20 1500
    = - 200 + 1500 + 300
    EXpected return = 1600
    idea hy just dont copy paste..
    3 value nahi aik pora period hy jo 3 session per contained hy

    ReplyDelete
  6. Standard Deviation k lye jo formula Page#87 pr given hai, wo use ho ga

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