Opening Date: Jan 03, 2020 12:00 AM
Closing Date: Jan 07, 2020 11:59 PM
Discussion is right way to get Solution of the every assignment, Quiz and GDB.
We are always here to discuss and Guideline, Please Don't visit Cyberian only for Solution.
Cyberian Team always happy to facilitate to provide the idea solution. Please don't hesitate to contact us! NOTE: Don't copy or replicating idea solutions. Quiz Copy Solution Mid and Final Past Papers Live Chat
Assignment #01Marks =20
Risk, Return and Investment Decisions Investment decisions are supported by various factors including investor choice of risk appetite, return on investment and most important the market situation that is backed by supply and demand forces. The supply and demand impact is reflected in the market price of securities and guide investors to take a rational decision.Along with market forces, company specific information is also helpful in determining the fair price of an investment. Rational investor s consider both market and company specific information to choose among different investment options. Following information is available for the three stock and you have to choose the two from the three securities to construct a portfolio.
Required:Calculate required rate of return for three stock using SML Equation,if risk free rate of return is 10%.Calculate Fair value of three stocks using Gordon Growth Model.Based on fair price calculation, identify whether the stocks are undervalued or overvalued, justify your answer with reasoning.Considering the above calculations,if you want to construct the portfolio of two stock from the above mentioned three stock., which two stocks you will add in your portfolio and why?NOTE: Formula and complete working is mandatory in each part, provide complete calculations in order to avoid marks deduction.IMPORTANT NOTE: 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.
IMPORTANT INSTRUCTIONS/ SOLUTION GUIDELINES/ SPECIAL INSTRUCTIONS 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 NewRoman” 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 coloronly 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. • Not submitted as per given format • It is cheated or copied from other students, internet, books, journals etc. Note related to load shedding:Dear students, As you know that semester activities have started and load shedding problem is also prevailing in our country. 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 or GDBs. Best of Luck!!
Required rate of Return of Stock A
r A = r RF + (r M – r RF ) β A
= 10% + (12% - 10%) 0.5
Required rate of Return of Stock B
r B = r RF + (r M – r RF ) β B
= 10% + (13% - 10%) 1.5
Required rate of Return of Stock C
r c = r RF + (r M – r RF ) β C
= 10% + (12.5%-10%) 1
Fair Price of Stock A
Po* = DIV1 / [(r RF + (r M – r RF) A) - g]
= 5/ [(10% + (12%-10%) 0.5)-4%]
5/7%=R s 71.43
Fair Price of Stock B
Po* = DIV1 / [(r RF + (r M – r RF) B) - g]
= 3/ [(10% + (13% - 10%) 1.5) – 6%
= 3/ 8.5%= R s 35.29
Fair Price of Stock C
Po* = DIV1 / [(r RF + (r M – r RF) C) - g]
= 6/ [10% + (12.5%-10%) 1) – 2%
= 6/10.5%= R s.57.14
Stock A is Undervalued as the fair price is more than the market price.
Stock B is Overvalued as the fair price is less than market price.
Stock C is Undervalued as the fair price is more than the market price.
The Stock A and Stock C should be used to construct the portfolio because of two reasons as the beta of Stock A and Stock C is less than Stock B. The required rate of return of Stock A is less than its market rate of return and required rate of return of Stock C is equal to its market rate of return while the required rate of return of Stock B is more than its market rate of return.
Why companies invest in projects with negative NPV? MGT201 Because there is hidden value in each project
Because there is hidden value in each project
53f62f37-283e-44ae-84d7-f7f266ad8dad-image.png bolded text
At the termination of project, which of the following needs to be considered relating to project assets? Salvage value
When a bond is sold at discount? MGT201
The coupon rate is greater than the current yield and the current yield is greater than yield to maturity
Which of the followings is (are) type (s) of problems associated with Capital Rationing? MGT201
Size Difference of cash flows
If dividends of preferred shareholders remain constant and required return decreases then what will be impact on present value of preferred shares? MGT201
Present Value of preferred share will decrease
If Net Present Value technique is used, what is the ranking criterion for projects? MGT201 Choose the highest NPV
Which one of the followings is type of problem associated with Capital Rationing? MGT201 Indifferent size of cash flows
Company A is analyzing some projects based on payback period amongst which one project will be selected. In your opinion which project is best for the company? MGT201
Project S with pay back period of 4.5 years
The value of the bond is NOT directly tied to the value of which of the following assets? MGT201 Real assets of the business
Real assets of the business Liquid assets of the business
Fixed assets of the business
Lon term assets of the business
A bond has 4.3% interest yield and 16.9% Yield to Maturity. What would Capital Gains of the bond? MGT201 12.6%
Capital budgeting techniques help management in _______. MGT201 Assessing financial viability of projects
What is difference between shares and bonds? MGT201
Bonds are representing ownership whereas shares are not Shares are representing ownership whereas bonds are not
Shares and bonds both represent equity
Shares and bond both represent liabilities
If there are equal chances of being paid back; whether 8% nominal interest rate is more attractive to a lender or 5% nominal interest rate? Explain your answer.
Nominal Interest Rate
The nominal interest rate is the stated interest rate of a bond or loan, which signifies the actual monetary price borrowers pay lenders to use their money. If the nominal rate on a loan is 5%, borrowers can expect to pay $5 of interest for every $100 loaned to them. This is often referred to as the coupon rate, because it was traditionally stamped on the coupons redeemed by bondholders.
The different types of interest rates, including real, nominal, effective and annual, are distinguished by key economic factors that can help individuals become shrewder investors.
Real interest rates, unlike nominal rates, take account of inflation.
Investors and borrowers should also be aware of the effective interest rate, which takes the concept of compounding into account.
Real Interest Rate
The real interest rate is so named, because unlike the nominal rate, it factors inflation into the equation, to give investors a more accurate measure of their buying power, after they redeem their positions. If an annually compounding bond lists a 6% nominal yield and the inflation rate is 4%, then the real rate of interest is actually only 2%.
It’s feasible for real interest rates to be in negative territory, if the inflation rate exceeds the nominal rate of an investment. For example, a bond with a 3% nominal rate will have a real interest rate of -1%, if the inflation rate is 4%. A comparison of real and nominal interest rates can be calculated using this equation:
RR=Nominal Interest Rate − Inflation Rate
RR = Real Rate of Return