Financial Management (Sec E) Assignment 2 5 Marks Handwritten

Due Date: 12th August 2019

1. You are considering purchasing the equity stock of NTN Company. The current price per share is ₹10. You
expect the dividend a year hence to be ₹1.20. You expect the price per share of MVM stock a year hence to
have the following probability distribution.
Price a Year hence ₹10 12 13
Probability 0.3 0.4 0.3
(a) What is the expected price per share a year hence?
(b) What is the probability distribution of the rate of return on NTN’s equity stock? (0.5 Marks)

2. The stock of Meta Company performs well relative to other stocks during recessionary period. The stock of
Deta Company, on the other hand, does well during growth periods. Both the stocks are currently selling for ₹60
per share. The rupee return (dividend plus price change) of these stocks for the next year would be as follows:
Economic Condition
High Growth Low Growth Stagnation Recession
Probability 0.3 0.2 0.25 0.25
Return on Meta Stock 57 52 62 72
Return on Deta Stock 77 62 52 42
Calculate the expected return and standard deviation of:
(a) ₹1000 in the equity stock of Meta;
(b) ₹1000 in the equity stock of Deta;
(c) ₹500 in the equity stock of Meta and ₹500 in the equity stock of Deta;
(d) ₹700 in the equity stock of Meta and ₹300 in the equity stock of Deta.
Which of the above four options would you choose? Why? (1 Mark)

3. The returns on the equity stock of Sumo Auto Limited and the market portfolio over a 12-year period are given
below:
Year Return on Sumo Auto Ltd. (%) Return on Market Portfolio (%)
1 16 11
2 -7 -3
3 19 12
4 28 21
5 11 13
6 26 29
7 4 -4
8 21 25
9 14 17
10 23 20
11 9 10
(a) Calculate the beta for the stock of Sumo Auto Ltd.
(b) Establish the characteristic line for the stock of Sumo Auto Ltd. (1 Mark)

4. The risk-free rate is 7 percent and the expected return on the market is 13 percent. What is the expected
return on a stock that has a beta of 1.2? (0.5 Marks)

5. The expected return on a stock that has a beta of 0.90 is 13.3 percent. The expected return on the market is
14 percent. What is the risk-free return? (0.5 Marks)

6. The following information is available in respect of the rate of return on investment (r), the capitalization rate
(ke) and earnings per share (E) of Hypothetical Ltd. r = 12 percent, E = Rs. 20
Determine the value of its share, assuming the following: (1.5 Marks)
D/P ratio (1-b) Retention Ratio (b) Ke(%)
A 10 90 22
B 20 80 21
C 30 70 20
D 40 60 19
E 50 50 18
F 60 40 17