Home > Corporate Finance, Financial Accounting, Investment Analysis & Portfolio Management > VU Specialization Certification:Fall 2010 Subject FIN630 Investment Analysis & Portfolio Management Assignment 1

VU Specialization Certification:Fall 2010 Subject FIN630 Investment Analysis & Portfolio Management Assignment 1

Subject: FIN630 Investment Analysis & Portfolio Management

Assighment 1:

Company A is currently selling for Rs. 90 and paying dividend of Rs. 10 per share. Dividend is expected to grow at rate of 5 percent per year. The required rate of return for investors is 17% to invest in the stock with the degree of riskness.

Company B is currently selling for Rs. 85 and paying dividend of Rs. 10 per share. For the next year dividend is Rs. 10.6 per share, which shows growth rate of 6 percent per year. The required rate of return for investors is 17% to invest in the stock with the degree of riskness.

A) Calculate the price of stock for Company A and Company B using Dividend Discount Model.

B) If you have to choose one of these two stocks, which stock you will buy?

C) If both companies have decided not to pay cash dividend but they are offering 10% stock dividend. If you are holding 500 shares of Company A and 1,000 shares of Company B, calculate total number of shares of each Company you will hold after receiving stock dividend.

Solution:

Part 1:

Company A:

Data available

Market selling price of share = Rs. 90

D0= Rs. 10

g= 5%

r=17%

need to find P0=?

P0 = (D0(1+g))/r-g

P0 = (10(1+0.05))/0.17-0.05

P0 = (10.5)/0.12

P0 = 87.5 answer

Conclusion: market selling value of share (i.e. 90) is greater than its present value (i.e. 87.5).

Company B:

Data available

Market selling price of share = Rs. 85

D0= Rs. 10

D1=10.6

g= 6%

r=17%

need to find P0=?

P0 = (D0(1+g))/r-g

P0 = (D1)/r-g

P0 = (10.6))/0.17-0.06

P0 = (10.6)/0.11

P0 = 96.4 answer

Conclusion: market selling value of share (i.e. 85) is smaller than its present value (i.e. 96.4).

Part 2:

I will buy stock of company B, because market selling price (i.e. Rs.85) of share is smaller than its PV (i.e. Rs. 96.4)

Part 3:

Data available

500 shares of company A

1000 shares of company B

10% dividend receives in form of stock dividend.

Need to find number of share of company A and Company B.

Company A:

Number of shares of company A = 500 + 500(10%)

Number of shares of company A = 500 + 500(.10)

Number of shares of company A = 500(1.1)

Number of shares of company A = 550 Answer

Company B:

Number of shares of company B = 1000 + 1000(10%)

Number of shares of company B = 1000 + 1000(.10)

Number of shares of company B = 1000(1.1)

Number of shares of company B = 1100 Answer

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