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MGT201 Assignment # 2 Solution & Discussion Due Date:07-06-2012

Semester “Spring 2012”
Financial Management (MGT201)
Assignment No. 02 Marks: 30
Case
Suppose Mr. Zafar, (a habitual investor in stocks) has currently maintained a portfolio as
mentioned below:
Stock Companies Beta Returns
Standard
Deviation
A Lucky Petroleum 0.95 7.2% 0.12
B MJ Corporation 1.25 14.6% 0.15
C Venus Industries 1.15 9.3% 0.10
His whole investment comprises of 10 million rupees, from which 32 percent was invested
in stock A and the rest was invested equally in stock B and C.
Risk and return specifications of this portfolio are as follows:
Beta 1.12
Return 10.4%
Variance 0.01
Standard deviation 0.09
* The correlation between AB is 0.75; AC is 0.35 and BC is -0.5*.
Now, Mr. Zafar is interested to extract his investment from stock C to further invest in
some other stock. For this purpose he is looking forward to investigate about two of the
potential opportunities prevailing in the market i.e:
I. Ghazi Company’s share (stock D) is available in the KSE at Rs. 40/- each. Company is paying
Rs. 5.6/- as dividend on each share with expected growth rate of 7.5%. Face Value of the share is
Rs.12/-. Risk free rate of return is 11%. Rate of return as per KSE Index is 14%; return on this
stock seems bit volatile as reflected by its beta i.e. 1.9.
II. Zamin Corporation’s share (stock E) is also available in KSE. Upon investigating its Price
Earnings (P/E) ratio, Mr. Zafar came to know that investors are willing to pay five rupees to
earn one rupee and industry average of P/E ratio is 6.5. Moreover, that the Company is paying
dividend of Rs. 28.5 per share which represents 30% of its earnings (EPS = Rs. 95) and the
dividend is expected to grow at 10% per year for foreseeable future. Mr. Zafar’s required rate of
return for this investment is 17%; while, the stock beta is 1.4.
Required:
1) You need to find out the intrinsic value of stock D of Ghazi Company through using SML
equation. (6 marks)
2) With the help of given information, you need to calculate the intrinsic value of Zamin
Corporation’s share (stock E)? (5 marks)
3) Based on intrinsic values and information of both stocks (D and E), you need to recommend
that which investment opportunity Mr. Zafar should opt? Give logical justification of your
recommendation. (3 marks)
4) Calculate portfolio’s beta, return, variance and standard deviation after replacing stock C with
new recommended stock that is assumed to have standard deviation of 0.11. The correlation
between stocks is supposed to be AD 0 .25; AE 0.3; BD 0.5 & BE is 0.7. (13 marks)
5) Comment and justify that whether new portfolio is better or the previous one with respect to
risk and return context? (3 marks)
(Show complete formulas, calculation/ working along with
decision comments as they carry marks)
Important Tips
1. This Assignment can be best attempted from the knowledge acquired after
watching video lecture no. 1 to lecture no.27 and reading handouts as well
as recommended text book).
Schedule
Opening Date and Time June 04, 2012 At 12:01 A.M. (Mid-Night)
Due Date and Time June 07, 2012 At 11:59 P.M. (Mid-Night)
Note: Only in the case of Assignment, 24 Hrs extra / grace period after the above
may be faced by the students on last date. This extra time should only be used to
meet the emergencies and above mentioned due dates should be treated as final to
avoid any inconvenience.
Important Instructions:
solution.
· Make sure that you upload the solution file before the due date. No
assignment will be accepted through e-mail once the solution has been
Formatting guidelines:
· Use the font style “Times New Roman” and font size “12”.
· Use black and blue font colors only.
Solution guidelines:
· Show complete formulas, calculation/ working along with decision comments
as they carry marks
· Every student will work individually and has to write in the form of an
analytical assignment.
· Give the answer according to question, there will be negative marking for
irrelevant material.
· For acquiring the relevant knowledge don’t rely only on handouts but watch
the video lectures and use other reference/ recommended books also.
Rules for Marking
· It has been submitted after due date
· The file you uploaded does not open or is corrupt
· It is in any format other than “.doc” (MS. Word)
· It is cheated or copied from other students, internet, books, journals etc…

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Replies to This Discussion

yr koi idea do assignment ka

plzz koi to idea do is assignment ka

idea send kro na discuss kya karain hm :)

plzzzzzzzzz koi upload kar de last date hai subho kindly

kal share karoon ga ...

plzzz kashif upload the solution today is last date

Its quite difficult, I think no one will be working on it.

koi tu post kar plzzz kisi ko nahi ati

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