Fin630 Assignment No. 1 Solution
Sunday, October 31, 2010 Posted In Fin Edit ThisAssignment #01 Dated:
Oct 25, 10
Oct 25, 10
Semester “Fall 2010”
“Investment Analysis & Portfolio Management” (Fin 630)
This is to inform that Assignment #01 (covering video lecture no. 1 to lecture no 10) will be uploaded on VULMS according to the following schedule
Schedule
Opening Date and Time
October 27, 2010 At 12:01 A.M. (Mid-Night)
Due Date and Time November 01, 2010 At 11:59 P.M. (Mid-Night)
Note: Only in the case of Assignment, 24 Hrs extra / grace period after the above mentioned due date is usually available to overcome uploading difficulties which may be faced by the students on last date. 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: 1. For acquiring the relevant knowledge, do not rely only on handouts but watch the course video lectures, for online lectures visit http://onlinevulectures.blogspot.com/ and also use other reference books.
2. For planning your semester activities in an organized manner, you are advised to view schedule of upcoming Assignments, Quizzes and GDBs in the overview tab of the course website on VU-LMS.
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Semester “Fall 2010”
“Investment Analysis & Portfolio Management” (Fin 630)
Assignment No.01 Marks: 15
'”"""Dividend Discount Model'''''''''''
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.
.................
Dividend Discount Model
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.
Part A solution:-
Po for A = D(1+g)/r-g
Po = 10(1+0.05)/0.17 – 0.05
Po = 10(1.05)/0.12
Po = 10.5/0.12
Po = 87.5
Po for B = D(1+g)/r-g
Po = 10(1+0.06)/0.17 – 0.06
Po = 10(1.06)/0.11
Po = 10.6/0.11
Po = 96.36
Solution Part B:-
In part B I will buy the stock of company "B" because its current market price is low than fair price which we have calculated by using dividend discount model. Stock of company "B" also has greater growth rate than stock of Company "A"
Solution of Par C
Company offers 10% stock dividend to all shareholders. Means that if you own 100 shares than company will give you 10 more shares free of cost. Number of shares increases but Total Value of Firm is unchanged.
Company A = 500 Share x 10%
Company A = 500 Share x 0.10
Company A = 50
Total Number of Shares = 500+50
Total Number of Share = 550 shares
Company B = 1000 Share x 10%
Company B = 1000 Share x 0.10
Company B = 100
Total Number of Shares = 1000+100
Total Number of Shares = 1100 shares
..........
Semester “Fall 2010”
“Investment Analysis & Portfolio Management” (Fin 630)
Assignment No.01 Marks: 15
'”"""Dividend Discount Model'''''''''''
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.
.................
Dividend Discount Model
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.
Part A solution:-
Po for A = D(1+g)/r-g
Po = 10(1+0.05)/0.17 – 0.05
Po = 10(1.05)/0.12
Po = 10.5/0.12
Po = 87.5
Po for B = D(1+g)/r-g
Po = 10(1+0.06)/0.17 – 0.06
Po = 10(1.06)/0.11
Po = 10.6/0.11
Po = 96.36
Solution Part B:-
In part B I will buy the stock of company "B" because its current market price is low than fair price which we have calculated by using dividend discount model. Stock of company "B" also has greater growth rate than stock of Company "A"
Solution of Par C
Company offers 10% stock dividend to all shareholders. Means that if you own 100 shares than company will give you 10 more shares free of cost. Number of shares increases but Total Value of Firm is unchanged.
Company A = 500 Share x 10%
Company A = 500 Share x 0.10
Company A = 50
Total Number of Shares = 500+50
Total Number of Share = 550 shares
Company B = 1000 Share x 10%
Company B = 1000 Share x 0.10
Company B = 100
Total Number of Shares = 1000+100
Total Number of Shares = 1100 shares
