# www.vustudents.ning.com

We non-commercial site working hard since 2009 to facilitate learning Read More. We can't keep up without your support. Donate.

Views: 1642

### Replies to This Discussion

MGT201 Assignment 1 Solution Fall 2020

RISK, RETURN AND INVESTMENT DECISIONS

QUESTION: Investment decisions are supported by various factors including investor choice of risk appetite, return on investment and most important market situation that is backed by supply and demand forces. The supply and demand is reflected in market price of security and guide investor to take a rational decision. Along with market decision, company specific information is also helpful in determining the fair price of investment. Rational investor considers both market and company specific information to choose among different options. Following information is available of three stock and you have to choose two from three securities to construct a portfolio.

 PARTICULARS STOCK A STOCK B STOCK C Market rate of return 12% 13% 12.5% Beta 0.5 1.5 1 Expected dividend from the next year Rs 5 per share Rs 3 per share Rs 6 per share Constant growth rate of dividend 4% 6% 2% Market price Rs 60 Rs 56 Rs47

*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 stocks are undervalued or overvalued, justify your answering with reason.

*considering the above calculation, if you want to construct portfolio of two stock from above mentioned three stocks, which two portfolio you will add in your portfolio and why?

SOLUTION:

1. We know that required rate of return=10%

So,

Required rate of return using SML equation of stock A= SML ℽA= RF+ ( ℽ- ℽRF A

A= 10% + (12%-10%)(0.5)

ℽA=11%

Required rate of return using SML equation of stock B=SML ℽB= ℽRF+( ℽ- ℽRF) βB

B= 10% + (13% - 10%)(1.5)

ℽB= 14.5%

Required rate of return using SML equation of stock C=SML ℽc= ℽRF + ( ℽ- ℽRF) βc

c = 10%+ (12.5%-10%)(1)

ℽc = 12.5%

1. Now, we have to calculate fair value of stock A, stock B and stock C.

Stock A Po* = Div / [(ℽRF + (ℽ- ℽRF ) A)-g]

=5/[10%+ (12%-10%)(0.5)-4%]

=5/[11%-4%]= 5/7%= Rs 71.42

Stock B Po* = Div / [(ℽRF + (ℽ- ℽRF ) B)-g]

=3/[10%+(13%-10%)(1.5))-6%]

=3/[14.5%-6%]= 3/[8.5%]= Rs 35.29

Stock C Po* = Div / [(ℽRF + (ℽ- ℽRF ) C)-g]

=6/[10%+(12.5%-10%)(1))-2%]

=6/[12.5%-2%]=6/10.5%= Rs 57.14

1. Let us check that which value is undervalue and which is overvalue.

For stock A

Rs 71.43> Rs 60

Which means       fair price > market price

Hence stock A is undervalue.

For stock B

Rs 35.42< RS 56

Which means      fair price< market price

Hence stock B is overvalue.

For stock C

Rs 57.14> Rs 47

Which means       fair price > market price

Hence stock C is undervalue.

1. We should buy stock A and C because fair value of A and C is greater than market value .

We know that portfolio is XA βA+ XB βB+ XC βC

And if we get only A and C then it becomes XA βA +XC βC

Other reason that we should not choose B is that its market value is very high and also its risk is more than A and C as it reaches to 1.5

Share the Assignment Questions & Discuss Here....

Stay touched with this discussion, Solution idea will be uploaded as soon as possible in replies here before the due date.

Assignment #01 Marks =20Assignment #01 Marks =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 investors 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.
Particulars Stock A Stock B Stock C Market rate of return 12% 13% 12.5% Beta 0.5 1.5 1 Expected dividend for the next year Rs. 5 per share Rs. 3 per share Rs. 6 per share Constant growth rate of dividend 4% 6% 2% Market price Rs. 60 Rs. 56 Rs. 47

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 New Roman” or “Arial” and font size “12”
• You may also compose your assignment in Open Office format
• Use black and blue font color only RULES FOR MARKING
• 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.
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!!

# Mgt201 Financial Management Assignment solution 2021 by Rashid Ahmad

Solution of Assignment

Assignment%20Fall%202020.docx

Full  Solution

MGT201-Assignment-1-Solution-Fall-2020

MGT201-Assignment-1-Solution-Fall-2020.docx

MGT201 Assignment 1 Solution Fall 2020

RISK, RETURN AND INVESTMENT DECISIONS

QUESTION: Investment decisions are supported by various factors including investor choice of risk appetite, return on investment and most important market situation that is backed by supply and demand forces. The supply and demand is reflected in market price of security and guide investor to take a rational decision. Along with market decision, company specific information is also helpful in determining the fair price of investment. Rational investor considers both market and company specific information to choose among different options. Following information is available of three stock and you have to choose two from three securities to construct a portfolio.

 PARTICULARS STOCK A STOCK B STOCK C Market rate of return 12% 13% 12.5% Beta 0.5 1.5 1 Expected dividend from the next year Rs 5 per share Rs 3 per share Rs 6 per share Constant growth rate of dividend 4% 6% 2% Market price Rs 60 Rs 56 Rs47

*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 stocks are undervalued or overvalued, justify your answering with reason.

*considering the above calculation, if you want to construct portfolio of two stock from above mentioned three stocks, which two portfolio you will add in your portfolio and why?

SOLUTION:

• We know that required rate of return=10%

So,

Required rate of return using SML equation of stock A= SML ℽA=RF+ ( ℽm - ℽRFA

A= 10% + (12%-10%)(0.5)

ℽA=11%

Required rate of return using SML equation of stock B=SML ℽB= ℽRF+(M - ℽRF) βB

B= 10% + (13% - 10%)(1.5)

ℽB= 14.5%

Required rate of return using SML equation of stock C=SML ℽc= ℽRF + ( ℽM - ℽRF) βc

c = 10%+ (12.5%-10%)(1)

ℽc = 12.5%

• Now, we have to calculate fair value of stock A, stock B and stock C.

Stock A Po* = Div / [(ℽRF + (ℽm - ℽRF ) A)-g]

=5/[10%+ (12%-10%)(0.5)-4%]

=5/[11%-4%]= 5/7%= Rs 71.42

Stock B Po* = Div / [(ℽRF + (ℽm - ℽRF ) B)-g]

=3/[10%+(13%-10%)(1.5))-6%]

=3/[14.5%-6%]= 3/[8.5%]= Rs 35.29

Stock C Po* = Div / [(ℽRF + (ℽm - ℽRF ) C)-g]

=6/[10%+(12.5%-10%)(1))-2%]

=6/[12.5%-2%]=6/10.5%= Rs 57.14

• Let us check that which value is undervalue and which is overvalue.

For stock A

Rs 71.43> Rs 60

Which means       fair price > market price

Hence stock A is undervalue.

For stock B

Rs 35.42< RS 56

Which means      fair price< market price

Hence stock B is overvalue.

For stock C

Rs 57.14> Rs 47

Which means       fair price > market price

Hence stock C is undervalue.

• We should buy stock A and C because fair value of A and C is greater than market value .

We know that portfolio is XA βA+ XB βB+ XC βC

And if we get only A and C then it becomes XA βA +XC βC

Other reason that we should not choose B is that its market value is very high and also its risk is more than A and C as it reaches to 1.5

one more file

MGT201-Assignment-1-Solution-Fall-2020-2