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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
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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
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.
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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.
Investing Rs. 100,000 at 12% interest rate compounded semiannually for 10 years
Depositing half of investment amount in a saving account for 10 years that pays 10 % interest rate compounded annually and investing remaining half amount at 12% interest rate compounded annually for 10 years.
Calculation of both Option
Semi Annual Yearly Compounding
FV = PV x (1 + i/2) 2n
FV = 100,000 x (1 + 0.12/2) 2 x 10
FV = 320713.5
FV= PV (1 + i) n
FV = 50,000 (1+0.12) 10
FV = 155292.4
Option 1 is best for Mr. Ahmad because the value of FV is grater than Option 2