MGT201
Assignment 3 Solution
Assignment 3 Solution
Solution:
Question
1: Calculation of Fair Price Each Stock for Textile
1: Calculation of Fair Price Each Stock for Textile
|
Sector Textile
|
Stock
|
Beta
|
Required Investment
|
Market Price
|
Dividend(Current Year)
|
|
A
|
1.5
|
25000
|
35
|
RS 5 @ 10% GROWTH
|
|
|
B
|
1
|
25000
|
29
|
RS 6 @ 8% GROWTH
|
|
|
C
|
2
|
25000
|
40
|
RS 10 @ 5% GROWTH
|
|
|
|
|
|
|
|
Note:
Risk Free Rate 15% and Market Rate is 25%
Risk Free Rate 15% and Market Rate is 25%
Question
1:Calculation of Fair Prices:
1:Calculation of Fair Prices:
Stock
A:
A:
P* =
DIV1/[rRF+(rM– rRF)A)-g
DIV1/[rRF+(rM– rRF)A)-g
Here
DIV = RS 5 for stock A
DIV = RS 5 for stock A
Risk
Free Rate = 15%
Free Rate = 15%
Market
Rate = 25%
Rate = 25%
Growth
Rate of Dividend Constant = 10%
Rate of Dividend Constant = 10%
Beta
of Stock A = 1.5
of Stock A = 1.5
P* =
5/[15%+(25%-15%)1.5)-10%]
5/[15%+(25%-15%)1.5)-10%]
P* =
5/(40%-15%)1.5)-10%
5/(40%-15%)1.5)-10%
P* =
5/27.5%
5/27.5%
P* = 18.18
Fair
Price for Stock B:
Price for Stock B:
P* =
DIV1/[rRF+(rM– rRF)A)-g
DIV1/[rRF+(rM– rRF)A)-g
P* =
6/[(15%+(25%-15%)1)-8%]
6/[(15%+(25%-15%)1)-8%]
P* =
6/[(15%+25%-15%)1)-8%]
6/[(15%+25%-15%)1)-8%]
P* =
6/17%
6/17%
P* = 35.29
Fair
Price for Stock C:
Price for Stock C:
P* =
DIV1/[rRF+(rM– rRF)A)-g
DIV1/[rRF+(rM– rRF)A)-g
P* =
10/[(15%+(25%-15%)2)-5%]
10/[(15%+(25%-15%)2)-5%]
P* =
10/[(15%+25%-15%)2)-5%]
10/[(15%+25%-15%)2)-5%]
P* =
10/45%
10/45%
P* = 22.22
Question
2: Stock is Over Valued or Under Valued with Reason
2: Stock is Over Valued or Under Valued with Reason
Solution:
|
Stock
|
Overvalued or Under Valued
|
Reason
|
|
A
|
Over Valued
|
Market Speculators Has Overvalued the Stock
|
|
B
|
Under Valued
|
Due to Macro View of the Economy is poor
|
|
C
|
Over Valued
|
Market Speculators Has Overvalued the Stock
|
Question
3:
3:
Solution:
|
Sectors
|
Stocks
|
Required Investment
|
|
Textile Sector
|
B
|
25000
|
|
Chemical Sector
|
L
|
30000
|
|
Food Sector
|
K
|
45000
|
Note: Decision
for Investment
for Investment
In Textile Sector we will
choose Investment for Stock B because Stock B is better than other Two stock A
,C. Stock A,C is over valued and its not better to invest so the stock B is under Valued and its better to
Invest in that Stock
choose Investment for Stock B because Stock B is better than other Two stock A
,C. Stock A,C is over valued and its not better to invest so the stock B is under Valued and its better to
Invest in that Stock
Question
4: Calculation of Stock Portfolio Beta
4: Calculation of Stock Portfolio Beta
Solution:
|
Sectors
|
Stocks
|
Beta
|
Required Investment
|
|
Textile Sector
|
B
|
1
|
25,000.00
|
|
Chemical Sector
|
L
|
1.5
|
30,000.00
|
|
Food Sector
|
K
|
1
|
45,000.00
|
|
|
|
|
100,000.00
|
Portfolio
Beta = XB βB + XL βL+ XK βK
Beta = XB βB + XL βL+ XK βK
Portfolio
Beta = 25000/100000*1+30000/100000*1.5+45000/100000*1
Beta = 25000/100000*1+30000/100000*1.5+45000/100000*1
Portfolio
Beta = 0.25+0.45+0.45
Beta = 0.25+0.45+0.45
Portfolio
Beta = 1.15
Beta = 1.15
Question
5: Calculation of ROR if Risk free Rate of Return will decrease to 10% all other
things remain same
5: Calculation of ROR if Risk free Rate of Return will decrease to 10% all other
things remain same
Solution:r
rA
= rRF+(rM– rRF) βA
= rRF+(rM– rRF) βA
rA
= 10%+(25%-10%)1.5
= 10%+(25%-10%)1.5
rA
= 32.5%
= 32.5%
rB
= rRF+(rM– rRF) βB
= rRF+(rM– rRF) βB
rB
= 10%+(25%-10%)1
= 10%+(25%-10%)1
rB
= 25%
= 25%
rC
= rRF+(rM– rRF) βC
= rRF+(rM– rRF) βC
rC
= 10%+(25%-10%)2
= 10%+(25%-10%)2
rC
= 40%
= 40%
Conclusion:
In
above calculation for ROR in Textile Sectors we conclude that Stock C having
ROR is higher than Stock A, B because Beta of Stock C is more riskier than
other two stocks so the investor will not invest in stock C
above calculation for ROR in Textile Sectors we conclude that Stock C having
ROR is higher than Stock A, B because Beta of Stock C is more riskier than
other two stocks so the investor will not invest in stock C
