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MGT201 Assignment 3 Solution

Solution:

Question 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%

Question 1:Calculation of Fair Prices:

Stock A:

P* = DIV1/[r_RF+(r_M- r_RF)A)-g

Here DIV = RS 5 for stock A

Risk Free Rate = 15%

Market Rate = 25%

Growth Rate of Dividend Constant = 10%

Beta of Stock A = 1.5

P* = 5/[15%+(25%-15%)1.5)-10%]

P* = 5/(40%-15%)1.5)-10%

P* = 5/27.5%

P* = 18.18

Fair Price for Stock B:

P* = DIV1/[r_RF+(r_M- r_RF)A)-g

P* = 6/[(15%+(25%-15%)1)-8%]

P* = 6/[(15%+25%-15%)1)-8%]

P* = 6/17%

P* = 35.29

Fair Price for Stock C:

P* = DIV1/[r_RF+(r_M- r_RF)A)-g

P* = 10/[(15%+(25%-15%)2)-5%]

P* = 10/[(15%+25%-15%)2)-5%]

P* = 10/45%

P* = 22.22

Question 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:

Solution:

Sectors	Stocks	Required Investment
Textile Sector	B	25000
Chemical Sector	L	30000
Food Sector	K	45000

Note: Decision 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

Question 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 = X_B β_B + X_L β_L+ X_K β_K

Portfolio Beta = 25000/100000*1+30000/100000*1.5+45000/100000*1

Portfolio Beta = 0.25+0.45+0.45

Portfolio Beta = 1.15

Question 5: Calculation of ROR if Risk free Rate of Return will decrease to 10% all other things remain same

Solution:r

r_A = r_RF+(r_M- r_RF) βA

r_A = 10%+(25%-10%)1.5

r_A = 32.5%

r_B = r_RF+(r_M- r_RF) βB

r_B = 10%+(25%-10%)1

r_B = 25%

r_C = r_RF+(r_M- r_RF) βC

r_C = 10%+(25%-10%)2

r_C = 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

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