With the aim of identifying companies in which to invest, you have reviewed two company's performance...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
With the aim of identifying companies in which to invest, you have reviewed two company's performance and characteristics, and have estimated their relationship to the wider market as detailed below: Current share price Current dividends per share (just paid) Current Beta Growth in dividends Company A Probability of Likely Return over Return next 12 months 0,20 0.50 0.30 -5% 7% 20% Other information: . Current risk-free rate of return: 3% p.a. . Current return on the market portfolio: 10% p.a. Company A $3.24 $0.12 0.9 5% 0.10 0.40 0.35 0.15 Company B $6.98 $0.65 1.2 Company B Probability of Likely Return over Return next 12 months 3% -2% 8% 15% 32% Calculate an expected return for each share that reflects your predictions for the next 12 months. (4 marks) b) Calculate the required return for each share, given its risk characteristics (4 marks) c) Draw a graph of the security market line and, based on your answers above, plot the return information for shares A and B on the graph. (5 marks) d) Calculate the intrinsic values of Company A's and Company B's shares. Based on your calculated intrinsic values, identify whether you would buy or sell cach of the shares. Provide justification for your decision. (6 marks) c) Given your answers to d), above, briefly explain, using your knowledge of market efficiency, what you would expect to happen to the share prices of Company A and Company B. Assume no new information enters the market. (5 marks) With the aim of identifying companies in which to invest, you have reviewed two company's performance and characteristics, and have estimated their relationship to the wider market as detailed below: Current share price Current dividends per share (just paid) Current Beta Growth in dividends Company A Probability of Likely Return over Return next 12 months 0,20 0.50 0.30 -5% 7% 20% Other information: . Current risk-free rate of return: 3% p.a. . Current return on the market portfolio: 10% p.a. Company A $3.24 $0.12 0.9 5% 0.10 0.40 0.35 0.15 Company B $6.98 $0.65 1.2 Company B Probability of Likely Return over Return next 12 months 3% -2% 8% 15% 32% Calculate an expected return for each share that reflects your predictions for the next 12 months. (4 marks) b) Calculate the required return for each share, given its risk characteristics (4 marks) c) Draw a graph of the security market line and, based on your answers above, plot the return information for shares A and B on the graph. (5 marks) d) Calculate the intrinsic values of Company A's and Company B's shares. Based on your calculated intrinsic values, identify whether you would buy or sell cach of the shares. Provide justification for your decision. (6 marks) c) Given your answers to d), above, briefly explain, using your knowledge of market efficiency, what you would expect to happen to the share prices of Company A and Company B. Assume no new information enters the market. (5 marks)
Expert Answer:
Answer rating: 100% (QA)
It seems that youve presented a finance problem that involves comparing the current share prices dividends and risk beta of two companies Company A and Company B To address each of the parts listed in ... View the full answer
Related Book For
Financial Accounting and Reporting
ISBN: 978-1292080505
17th edition
Authors: Barry Elliott, Jamie Elliott
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Identify and then briefly explain the eight general audit procedures used to gather evidence. Next, please provide an example for each of the eight procedures?
-
Air flows at high speed through a Herschel venturi monitored by a mercury manometer, as shown in Fig. P6.161. The upstream conditions are 150 kPa and 80°C. If h = 37 cm, estimate the mass flow in...
-
Stanford issues bonds dated January 1, 2018, with a par value of $500,000. The bonds annual contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The bonds mature in...
-
The method of adjusting the budget to reflect the actual volume of sales is called a. Flexible budgeting b. Activity-based budgeting c. Program budgeting d. Incremental budgeting
-
Joe Mason acquired land on which he will construct a new restaurant. A chemi-cal plant had once occupied the site. Government regulations require Mason to clean up the chemical residue before...
-
Laura has a $1000 bond with a 3.4% coupon. Laura purchased this bond for $1065. What is the yield of this new bond? A. 3.0% B. 3.6% C. 3.4% D. 3.2%
-
Jim and Joel have come to you to get an appraisal to lease their property. Using the information below, complete the following questions: Answer the below questions according to the property details...
-
Carlota had $129,000 of income from wages and $1,250 of taxable interest. Carlota also made contributions of $2,800 to a tax-deferred retirement account. Carlota has 0 dependents and files as single....
-
Calculate the reverberation time at 500 Hz for a hall of volume 2000m3 having the following surface finishes: Surface area 300m brickwork 500m wall plaster 350m ceiling plaster 400m wooden block...
-
Perform the following convolutions x[n]*v[n]. For (a) do it analytically, for (b) use any method. a)x[n] =u[n] - u[n- 4], v[n] =0.5" u[n] b) x[n] = [ 1 4 8 2 ];v[n] = [01 0 1 2 3 4] (the sequences...
-
Can you elaborate on the physiological mechanisms underlying stress responses, including the intricate interplay between the hypothalamic-pituitary-adrenal axis, autonomic nervous system, and...
-
Stokel-Walker, C. HP wins huge fraud case against autonomy's Mike Lynch. Wired. Retrieved from https://www.wired.com/story/mike-lynch-autonomy-extradition/ This can also be found on the ACFE.com home...
-
Choose one political sociology framework or theorist and apply their ideas to this video . https://www.youtube.com/watch?v=gLQysmg3xgE Choose one political sociology framework or theorist and apply...
-
Don't use chatGTP/AI bot other wise down vote, I am post this question third time so please provide the correct Answer . Aqua Company will have to repay its $10,000,000 bonds on January 1, 2035. O...
-
Critical reading SAT scores are distributed as N(500, 100). a. Find the SAT score at the 75th percentile. b. Find the SAT score at the 25th percentile. c. Find the interquartile range for SAT scores....
-
The financial statements of Saturn plc have been prepared as follows: Further information: (a) Extract from statement of income 000 Operating profit.........................1,008 Dividend...
-
Mr Norman is going to set up a new business in Singapore on 1 January 20X8. He will invest $150,000 in the business on that date and has made the following estimates and policy decisions: 1. Forecast...
-
Backwater Construction Company is reviewing a major contract which is in serious difficulty. The contract price is 10,000,000. The project involves the construction of four buildings of equal size...
-
Wallway Company manufactures toasters. For the first 8 months of 2002, the company reported the following operating results while operating at 75% of plant capacity: Cost of goods sold was 70%...
-
Barrila Enterprises uses a word processing computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus ever} third Saturday, to keep up...
-
Andrea Valencia recently opened her own basket weaving studio. She sells finished baskets in addition to the raw materials needed by customers to weave baskets of their own. Andrea has put together a...
Study smarter with the SolutionInn App