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/[rRF+(rM- rRF)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/[rRF+(rM- rRF)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/[rRF+(rM- rRF)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 = XB βB + XL βL+ XK βK
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
rA = rRF+(rM- rRF) βA
rA = 10%+(25%-10%)1.5
rA = 32.5%
rB = rRF+(rM- rRF) βB
rB = 10%+(25%-10%)1
rB = 25%
rC = rRF+(rM- rRF) βC
rC = 10%+(25%-10%)2
rC = 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