Joanna is a financial analyst in CCB Investment Bank and she is responsible to monitor the firm funds and her clients funds. The firm has RM200 million funds and invested 50% in abroad both in stocks and bonds and the remaining in domestic capital market. The firm allocation for the domestic bonds is 60% and the remaining in foreign bonds. RM150 million invest in domestic stocks and remaining in foreign stocks.

CCB invest 20% of domestic stocks in Ribut stock, 30% in Jabun stock and the remaining in Bolabu stock. Ribut Corporation has 10 million shares of 50 sen par value. Ribut stock has just paid a dividend of RM1.20 per share. Ribut price is RM20 per share. The dividend growth rate is 7%. Last years sales for Ribut were RM10 million and increased 20% in this year. Its asset turnover ratio was 4 times and net profit after tax was 20% from its sales.

Jabun stock has 10 million shares of RM1 par value. Its price earnings ratio (PE) is 7 times. The shares currently priced at RM2.50 per share and its return on assets is 20% and the return on its equity is 15%. The total amount of dividend declared is RM1 million. The firm has expected the growth rate at 15% for the next 2 years and reduce by 9% thereafter.

Bolabu stock with 200 million shares at RM0.50 par valued and outstanding. Their companys end of year profit after tax last year was RM100 million. For this year there is an increase of 50% on its profit after tax. The dividend yield is 12% and currently the price is RM12 per share. The growth rate of dividend for Bolabu is 9%. Its total liabilities is RM12 million and its total equities is RM10 million.

The beta for Ribut is 1.1, Jabun is 0.75 and Bolabu is 1.2. The expected return for Ribut 20%, Jabun expected return is less 7% than Ribut and Bolabu expected return is more 3% than Jabun. The Malaysia treasury bills is 3.5% and the expected market return is 12%.

1. What is EPS for Ribut, Jabun and Bolabu stocks?

(6 marks)

(CLO2:PLO2:C6)

2. What is the value of these three stocks?

(8 marks)

(CLO2:PLO2:C6)

3. Evaluate the ROA for each of the above stocks. (Justify from your calculation)

(3 marks)

(CLO2:PLO2:C6)

4. According to the Security Market Line (SML), what is the alpha of each of the stocks?

(6 marks)

(CLO2:PLO2:C6)

5. What is the expected return portfolio and the beta portfolio from the domestic stocks?

(4 marks)

(CLO2:PLO2:C6)

6. Compute the risk premium and the slope of the SML.

(4 marks)

(CLO2:PLO2:C6)

7. Plot the SML graph (without using the graph paper). Indicate all the stocks, the expected return, the alpha, the risk premium and the slope.

(5 marks)

(CLO2:PLO2:C6)

8. Evaluate all the above stocks according to (a), (b), (c) and (d). Which stock(s) are worth to invest?