a) You need to calculate the expected return, standard deviation of returns and coefficient of variations for MAQ Motors’ investment opportunity.
Solution of Part a
Expected ROR =<r>= ∑ Piri=12%,
Std Dev=σ = (∑(ri – < ri> ) 2 * Pi)0.5 = 11.66%
CV = σ / <r>= 0.97
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.
Solution of Part b
PV = Po* = DIV1 / (rce – g) = 22.22
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.
Solution of Part c
Stock Y: PV=Po* = DIV1 / (rce – g)= 2850
Stock Z: PV=Po* = DIV1 / (rce – g)= 2700
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.
Solution of Part d
Zero Growth Pricing: Po* = DIV1/rCE= 40
Constant Growth Pricing: Po* = DIV1/ (rCE – g)= 66.66