Course : Investment Management

Q$1.$ Suppose Dubai Islamic Bank $($DIB$).,$ currently pays a dividend of $$1\mathrm{.}22,$ which is expected to grow indefinitely at $5\%.$ If the current value of ADIB shares based on the constant$-$growth dividend discount model is $$32\mathrm{.}03,$ what is the required rate of return?

Q$2.$ The market consensus is that Emmar has an ROE $=9\%,$ a beta of $1\mathrm{.}25,$ and plans to maintain indefinitely its traditional plowback ratio of $2/3.$ This year$$s earnings were $$3$ per share. The annual dividend was just paid. The consensus estimate of the coming year$$s market return is $14\%,$ and T$-$bills currently offer a $6\%$ return.

a$.$ Find the price at which Analog stock should sell.

b$.$ Calculate the P$/$E ratio.

c$.$ Calculate the present value of growth opportunities.

d$.$ Suppose your research convinces you Analog will announce momentarily that it will

immediately reduce its plowback ratio to $1/3.$ Find the intrinsic value of the stock.

Q$3.$ What do we mean by fundamental risk, and why may such risk allow behavioral biases to persist for long periods of time?

Q$4.$ Some supporters of behavioral finance agree with efficient market advocates that indexing is the optimal investment strategy for most investors. But their reasons for this conclusion differ greatly. Compare and contrast the rationale for indexing according to both of these schools of thought.