Abdul Hannan Chaudhry has been struggling in life after being unable to survive the grueling demands of university life. Thinking back about the choices made in university days, and regretting signing up for Intermediate Finance course in Spring 2021. With online learning and Aun as the instructor, this was a bad combination and caused the inevitable of university dropout after failing the course. Life has been a struggle since then, and for once suddenly there was a glimmer of hope. Now things had suddenly taken a turn for good through a letter announcing an inheritance of $240000 from a grand aunt. Abdul Hannan Chaudhry wanted to make smart investment to ensure he had enough resources to live comfortably to make the best use of this money. While roaming the streets in Y Block market, Abdul Hannan Chaudhry came across who was the TA of the unfortunate course in university days Muhad is now a famous investment professional. Their conversation transcript is below. Muhad: Hey, why are you so lost? Abdul Hannan Chaudhry: No, I am fine. I was just wondering about some financial plans, and I am so confused as to what should I do? Muhad: I guess if you had studied properly in university, you would not be confused. However, since it is my relevant domain, maybe I can help you in better decision making. Tell me what exactly is the dilemma? Abdul Hannan Chaudhry: Recently, I received 240000$ as inherited money from a relative, and as far as I know, the time value of money would result in reducing the value of this amount over the years. I do not want that. I want to invest this money somewhere. Can you assist me in making a better investment decision? Muhad: I totally get your problem. Tell me one thing, would you like to go for a risky strategy, obviously that might give you high return or prefer a less risky investment? Abdul Hannan Chaudhry: I am not sure about financial plans, but I believe I would not want to take up a risky investment at the very start. Muhad: That makes sense. That means you should go for a diversified portfolio of financial securities so that there is less risk, and you get the desired return as well. I would suggest you go with a mix of 2 stocks and one treasury bond. Muhad calls his friend, Aun who is still teaching finance at university. Muhad: Hey a colleague of mine wants to invest in two stocks and a treasury bond. Can you please help us find the mix that is expected to provide a good return? Aun: Yes, sure. Well, treasury bonds are providing a return of 4%, which is good. One of the stocks I would suggest your friend is to go with Happy Times Inc. stock. The company operates in the dyeing industry for over a decade, and it is an all-equity firm. The company had IPO 2 years back, and there are currently 3 million shares that are being traded in the market at a price of $7 per share. With a beta of 1.4 and market premium of 6%, the stock is pretty attractive. Muhad: That sounds interesting. What about the dividends and beta for the company? Aun: I believe the company is expected to pay a dividend of $0.5 per share from the next year which are expected to grow at 4% there onwards. Also, the company is introducing leverage in their capital structure, by issuing bonds to buy back equity. They are looking at 2:1 Equity: Debt ratio, and they should casily be able to raise Debt by providing a yield of 8%, and that would definitely impact the equity returns via beta. Muhad: That sounds interesting. What about the other stock? Aun: The second one, which I would suggest is Braggs Textile Stock. The stock is generating returns of 12%,14%, 13.5%, and 11% for the past four years and is expected to perform well in the future as well. Their beta is 0.6 a Muhad: Thanks Aun, one last bit of information I'd like to know what is the tax rate nowadays? Aun: The corporate tax rate is 30%. Muhad: This helped me a lot. Thank you so much for taking out time. Now Muhad has to help decide Abdul Hannan Chaudhry; how much should be invested in all these financial securities to generate the desired return? 1. What is the Retum on stock (Use CAPM) of Happy Times when it is an only equity firm? (2 marks) 2. How much Debt amount does Happy Times have to raise? (1 mark) 3. What is the new beta of Happy Times Stock once leverage is taken? (2 marks) 4. What is the expected return on the Happy Times stock after recalibration of the capital structure? (2 marks) 5. What is the retum on Bragg's Textile Stock? (2 marks) 6. You need to ensure investment at least 20% in cach of three securities, (Happy Times Stock, Braggs Textile Stock and Treasury Bond). How much should you invest in all three to have a minimum risk portfolio with available information? (Short Selling is not allowed) (3 marks). 7. What will be the expected return of your portfolio? An investment was made on the advice you gave in question 6, new information has come up after that, what has happened after you invested in the portfolio Treasury Yields have gone down to 2.5%. Happy Times has decided to further take on additional debt at 9.5% and move to 1:2 Equity: Debt ratio. While Covariance of Braggs and Market remained the same, the Marker variance has gone down by half. 8. What's the beta of Happy Times stock now? (2 marks) 9. What is the expected return on the Happy Times stock after recalibration of the capital structure? (2 marks) 10. Will Beta of Braggs change? If yes, by how much? (2 marks) 11. What is the market premium for Braggs stock, assuming the market premium remains unchanged. (3 marks) 12. What is the new expected return of your portfolio? (3 marks) Abdul Hannan Chaudhry has been struggling in life after being unable to survive the grueling demands of university life. Thinking back about the choices made in university days, and regretting signing up for Intermediate Finance course in Spring 2021. With online learning and Aun as the instructor, this was a bad combination and caused the inevitable of university dropout after failing the course. Life has been a struggle since then, and for once suddenly there was a glimmer of hope. Now things had suddenly taken a turn for good through a letter announcing an inheritance of $240000 from a grand aunt. Abdul Hannan Chaudhry wanted to make smart investment to ensure he had enough resources to live comfortably to make the best use of this money. While roaming the streets in Y Block market, Abdul Hannan Chaudhry came across who was the TA of the unfortunate course in university days Muhad is now a famous investment professional. Their conversation transcript is below. Muhad: Hey, why are you so lost? Abdul Hannan Chaudhry: No, I am fine. I was just wondering about some financial plans, and I am so confused as to what should I do? Muhad: I guess if you had studied properly in university, you would not be confused. However, since it is my relevant domain, maybe I can help you in better decision making. Tell me what exactly is the dilemma? Abdul Hannan Chaudhry: Recently, I received 240000$ as inherited money from a relative, and as far as I know, the time value of money would result in reducing the value of this amount over the years. I do not want that. I want to invest this money somewhere. Can you assist me in making a better investment decision? Muhad: I totally get your problem. Tell me one thing, would you like to go for a risky strategy, obviously that might give you high return or prefer a less risky investment? Abdul Hannan Chaudhry: I am not sure about financial plans, but I believe I would not want to take up a risky investment at the very start. Muhad: That makes sense. That means you should go for a diversified portfolio of financial securities so that there is less risk, and you get the desired return as well. I would suggest you go with a mix of 2 stocks and one treasury bond. Muhad calls his friend, Aun who is still teaching finance at university. Muhad: Hey a colleague of mine wants to invest in two stocks and a treasury bond. Can you please help us find the mix that is expected to provide a good return? Aun: Yes, sure. Well, treasury bonds are providing a return of 4%, which is good. One of the stocks I would suggest your friend is to go with Happy Times Inc. stock. The company operates in the dyeing industry for over a decade, and it is an all-equity firm. The company had IPO 2 years back, and there are currently 3 million shares that are being traded in the market at a price of $7 per share. With a beta of 1.4 and market premium of 6%, the stock is pretty attractive. Muhad: That sounds interesting. What about the dividends and beta for the company? Aun: I believe the company is expected to pay a dividend of $0.5 per share from the next year which are expected to grow at 4% there onwards. Also, the company is introducing leverage in their capital structure, by issuing bonds to buy back equity. They are looking at 2:1 Equity: Debt ratio, and they should casily be able to raise Debt by providing a yield of 8%, and that would definitely impact the equity returns via beta. Muhad: That sounds interesting. What about the other stock? Aun: The second one, which I would suggest is Braggs Textile Stock. The stock is generating returns of 12%,14%, 13.5%, and 11% for the past four years and is expected to perform well in the future as well. Their beta is 0.6 a Muhad: Thanks Aun, one last bit of information I'd like to know what is the tax rate nowadays? Aun: The corporate tax rate is 30%. Muhad: This helped me a lot. Thank you so much for taking out time. Now Muhad has to help decide Abdul Hannan Chaudhry; how much should be invested in all these financial securities to generate the desired return? 1. What is the Retum on stock (Use CAPM) of Happy Times when it is an only equity firm? (2 marks) 2. How much Debt amount does Happy Times have to raise? (1 mark) 3. What is the new beta of Happy Times Stock once leverage is taken? (2 marks) 4. What is the expected return on the Happy Times stock after recalibration of the capital structure? (2 marks) 5. What is the retum on Bragg's Textile Stock? (2 marks) 6. You need to ensure investment at least 20% in cach of three securities, (Happy Times Stock, Braggs Textile Stock and Treasury Bond). How much should you invest in all three to have a minimum risk portfolio with available information? (Short Selling is not allowed) (3 marks). 7. What will be the expected return of your portfolio? An investment was made on the advice you gave in question 6, new information has come up after that, what has happened after you invested in the portfolio Treasury Yields have gone down to 2.5%. Happy Times has decided to further take on additional debt at 9.5% and move to 1:2 Equity: Debt ratio. While Covariance of Braggs and Market remained the same, the Marker variance has gone down by half. 8. What's the beta of Happy Times stock now? (2 marks) 9. What is the expected return on the Happy Times stock after recalibration of the capital structure? (2 marks) 10. Will Beta of Braggs change? If yes, by how much? (2 marks) 11. What is the market premium for Braggs stock, assuming the market premium remains unchanged. (3 marks) 12. What is the new expected return of your portfolio