Scribd
Upload
43 views4 pages

MGT201 Assignment 1 Solution Solution: Question 1: Calculation of Fair Price Each Stock For Textile

This document provides the solution to an assignment involving calculating fair stock prices, determining if stocks are overvalued or undervalued, selecting stocks for investment, calculating a stock portfolio's beta, and recalculating rates of return with a changed risk-free rate. For Question 1, the fair prices are calculated for Stocks A, B, and C in the textile sector using the capital asset pricing model. For Question 2, Stocks A and C are identified as overvalued while Stock B is undervalued. Question 3 involves selecting Stock B for investment in the textile sector since it is undervalued compared to Stocks A and C. Question 4 calculates the beta of a stock portfolio. Question 5 recalculates the

Uploaded by

rafaqat rafaqat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
43 views4 pages

MGT201 Assignment 1 Solution Solution: Question 1: Calculation of Fair Price Each Stock For Textile

This document provides the solution to an assignment involving calculating fair stock prices, determining if stocks are overvalued or undervalued, selecting stocks for investment, calculating a stock portfolio's beta, and recalculating rates of return with a changed risk-free rate. For Question 1, the fair prices are calculated for Stocks A, B, and C in the textile sector using the capital asset pricing model. For Question 2, Stocks A and C are identified as overvalued while Stock B is undervalued. Question 3 involves selecting Stock B for investment in the textile sector since it is undervalued compared to Stocks A and C. Question 4 calculates the beta of a stock portfolio. Question 5 recalculates the

Uploaded by

rafaqat rafaqat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

MGT201 Assignment 1 Solution

Solution:
Question 1: Calculation of Fair Price Each Stock for Textile

Market Dividend(Current
Stock Beta Required Investment Price Year)

RS 5 @ 10%
A 1.5 25000 35 GROWTH
Sector
Textile
B 1 25000 29 RS 6 @ 8% GROWTH

RS 10 @ 5%
C 2 25000 40 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

You might also like