4G.II 4G. 0.3K/s 09:36 RISK AND RETURN AND... RISK & RETURN AND PAYOFF TABLES TUTORIAL QUESTION 1 Mr. Nel, an entrepreneur who is currently 55 years old, took early retirement from his business which he had started 30 years ago. He still wants to be involved in investments to keep his mind occupied while on "permanent" holiday. While thinking about investment opportunities, he realised that one of his most consistent expenses is his cell phone bill. He has a MTN and a separate VODACOM contract which he pays monthly. He thought to himself, "Why not invest in the company that I am contributing to on a monthly basis." He decided to conduct research on the two entities in order to assist him with his investment decision. The following information was gathered regarding the two companies: VODACOM Vodacom is a leading African communications group providing mobile communications and related services to 40.4 million customers. Its mobile network covers calls to a total population of approximately 182 million people across five countries: South Africa, Tanzania, the DRC, Lesotho and Mozambique. MTN Launched in 1994, the MTN Group Limited (MTN Group) is a multinational telecommunications group offering cellular network access and business solutions. It has mobile licenses across 21 countries in Africa and the Middle East and has more than 98.2 million subscribers. FINANCIAL INFORMATION Vodacom MTN Equity Beta 1.23 1.28 Telecommunication industry beta 1.32 1.32 Risk free rate (SA) (10yr bond) 8.25% 8.25% Profit March 2010 R19.8 bil R46.1 bil Profit March 2009 R22.3 bil R48.2 bil Profit March 2008 R21.5 bil R44.6 bil Investment return on JSE portfolio 19.50% 19.50% Total Subscribers 40.4mil 98.2mil SA ARPU* R 147 R 139 Note: ARPU can be defined as Annual Revenue Per User REQUIRED: 1. 2. Calculate the standard deviation of both service providers and interpret which share carries the most total risk? Which cell phone service provider should Mr. Nel invest in from a risk management perspective and why? QUESTION 2 The committee of a new golf club is setting the annual membership fee. The number of m depends on the membership fee charged and economic conditions. The forecast annual cash inflow> from membership fees are shown below: 20 56 1. Calculate the standard deviation of both service providers and interpret which share carries the most total risk? 2. Which cell phone service provider should Mr. Nel invest in from a risk management perspective and why? QUESTION 2 The committee of a new golf club is setting the annual membership fee. The number of members depends on the membership fee charged and economic conditions. The forecast annual cash inflows from membership fees are shown below: Membership fee N$600 N$800 N$900 N$1000 Membership level Low Average High N$000 N$000 N$000 360 480 540 400 440 480 360 405 495 320 380 420 Required: a) Explain the concept of maximax and determine the fee the committee would set if the maximax criterion is applied. b) Explain the concept of maximin and determine the fee the committee would set if the maximin criterion is applied. c) Explain the concept of minimax regret and determine the fee the committee would set if the minimax regret criterion is applied. 2/2