1.Bambu, Inc., is considering an investment in one of two common stocks, Series-A or Series B. The company made extensive scenario analysis and came up with the following summary statistics regarding the likely outcome of the two investment opportunities.

(a)Calculate the expected return and standard deviation (risk measure) for each stock. All percentage calculations should be up to 4 decimal place, i.e. 2.31% or .0231.

Series-A

Probability

Return

.15

-10%

.55

-3%

.20

18%

.10

25%

Series-B

Probability

Return

.35

-6%

.50

5%

.15

15%

(b)Given this information, which investment is better, based on risk (as measured by the standard deviation) and return? Explain

Based on return:

Based on risk:

Overall:

3-1. You own 200 shares of Jaibu series-X common stock, which currently sells for $58.50 per share and recently paid a dividend of $5.25 per share. It is known that Jaibu return on equity is 9.25 percent and the retention rate is 35 percent of net income. Your required rate of return is 6.5 percent.

a.What is the growth rate of this stock? Show your work.

b.What is the dividend that will be paid next year? Show your work.

c.What is your valuation of this stock? Show your work.

d.Should you sell your stocks? Explain.

3-2. You also own 300 shares of Jaibu series-Y common stock, which currently sells for $128.50 per share and will pay a dividend of $12.25 per share at end of year. It is known that the firms earnings per share were $13.24 in 2008 and has risen steadily to $19.45 by 2015, which also reflects the expected growth in dividends per share for the indefinite future.

a.What is the growth rate of this stock? Show your work.

b.What is your expected rate of return (up to four decimals)? Show your work.

c. If you require 6.25 percent return on Series-Y investment, should you sell or buy more stock?