DUE DATE: 10TH Jan 2013
ASSIGNMENT NO. 02
MARKS: 20
“Risk and Return – Stock Valuation”
Objectives:
To understand the analysis of risk and return for single stock investment. To recognize the evaluation and application of common stock pricing and
dividend growth models
The Case:
Recently after graduating from Local Business College (LBC), you have started your own investment consultancy firm – Prudent Consultants (PC’s) to earn your livelihood. Mr. Zain, a regular investor approaches you to get some financial advice on different intended stocks. On the basis of his preliminary research, Zain is curious in reaping the risk and returns associated with these stocks. For your convenience, he has also brought necessary information regarding these stocks along with him:
MAQ Motors’ possible returns on investment of Rs.10,000 in common stock, over the coming year is as follows:
Economic conditions Probability (p) Returns (r) in Rupees
Recession 0.20 – 1, 000
Normal 0.60 1, 500
Boom 0.20 2, 500
Wahid Consultant Company, on its stock, is currently paying Rs. 2 per share as dividend, which is expected to grow at a constant rate of 7 percent per year.
Zahoor Company’s stock Y is expected to pay a dividend of Rs. 57; while, stock Z is expected to pay a dividend of Rs. 54 in the upcoming year. The
expected growth rate of dividends for both stocks is 7%.
Ideal Contractors’ common stock (a very long term investment) is also available. Mr. Zain’s required return on this investment (based on risk) is 25%
(r). The present dividend offered by the Company is Rs 10; while, the par value of each stock is Rs 100. CE Based on provided information:
a) You need to calculate the expected return, standard deviation of returns and coefficient of variations for MAQ Motors’ investment opportunity. [7 marks]
b) You are expected to analyze the price of Wahid Consultant Company’s stock in case Mr. Zain requires a rate of return of 16 percent to invest in this stock with this degree of riskiness. [4 marks]
c) You need to identify which stock of Zahoor Company has higher intrinsic value; in case, Mr. Zain wishes to earn a return of 9% on each stock. [5 marks]
d) You are supposed to determine the dividend yield pricing for common stock of Ideal Contractors using both: ‘Zero Growth Pricing’ plus ‘Constant Growth
Pricing’ Models (where: g=10%). Also compare & interpret the result. [4 marks]
Formulas are :
1.The rate of return on an investment can be
calculated as follows:
Return = (Amount received – amount invested ) / amount invested
2. standard deviation is the square root of variance.
3. Coefficient of Variation:
= S.D. / Return; or Risk / Return
Note: for students convenience team has prepared a presentation on the said topic, this presentation will be helpful in understanding the main theme of this assignment. plz study the attached file.
