Financial Management (MGT201)

                         Financial Management (MGT201)

Assignment Solution:

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

Solution:

Return on investment=10000

Expected return:

Economic condition	Probability(p)	Return in rupees	Return in %age	<r>=Pi.ri
Recession	0.20	-1000	-1000/10000*100=-10	0.20*-10=-2
Normal	0.60	1500	1500/10000*100=15	0.60*15=9
Boom	0.20	2500	2500/10000*100=25	0.20*25=5
				Total=9+5-2=12

Expected Return= 12%

Standard Deviation: =s= (∑(ri - <ri>)²*pi)0.5

       = { [((-10)-12)²(0.20)]+ [(15-12)²⁽0.60)]+ [(25-12)²(0.20)] } 0.5   

      = { [(-22)²(0.20)]+ [(3)²(0.60)]+ [(13)²⁽0.20)] } 0.5   

      ={ [484(0.20)]+ [9(0.60)]+ [169⁽0.20)] } 0.5   

      ={ [96.8]+ [5.4]+ [33.8] } 0.5   

      ={136}0.5 =11.661

Coefficient of variations:  s/<r>

  

s = 11.661    <r >= 12%

= s/<r>

= 11.661 / 12=0.971

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]

Solution:

 Given values:    rCE= 16%, DIV= 2 Rs, g = 7%

PV= Po* = DIV / (rce)-g

            = 2 / 16-7 = 0.22 =0.22*100=22.23

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]

Solution:

 Stock Y: PV= Po* = DIV / (rCE)-g

                               = 57 / (9) – 7 = 57 / 2 =28.5 *100= 2850

Stock Z: PV= Po* = DIV / (rCE)-g

                                = 54 / (9) – 7 = 54 / 2 = 27*100 =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. [4 marks]

Solution:

Zero growth pricing = Po* = DIV / rCE

 Given values:        Rce= 25%               div =10 Rs    par value=100

Po* = DIV / rCE

       = 10 / 25

       =0.4 *100 = 40%

Constant growth pricing= Po* = DIV / ((rCE)-g)

    Given values:                      Rce= 25%  ,             div =10 Rs,         par value=100

Formula:  Po* = DIV / ((rCE)-g)

      = 10 / (25 – 10)

      = 10 / 15

      =0.6 *100 = 66.67%

Dividend yield according to both models:

 Zero growth pricing  = 40%

Constant growth pricing = 66.67%