mosles o 5 4 4 QUESTION TWO a) There are a number of factors that need to be taken into consideration as to whether to pay dividend or retain earnings. Discuss four (4) factors to be considered in establishing an optimal dividend or retention policy. [4 Marks) b) Consider the following expected returns, volatilities, and correlations: Correlation with Duke Energy Expected Standard Return Deviation 14% 6% 44% 24% 23% 14% Stock Duke Energy Microsoft Wal-Mart Correlation with Microsoft -1.0. 1.0 0.7 Correlation with Wal- Mart 0.0 0.7 1.0 1.0 - -1.0 0.0 i. ii. Consider a portfolio consisting of only Duke Energy and Microsoft. What is the percentage of your investment (portfolio weight) that you would place in Duke Energy stock to achieve a risk-free investment? [4 Marks] What is the expected return of a portfolio that is equally invested in Duke Energy and Microsoft? [3.5 Marks] What is the volatility of a portfolio that is equally invested in Duke Energy and Microsoft? [3.5 Marks] Total [15 marks] III. QUESTION THREE a) Company A's EPS is GH1.50. Its closest competitor, Company B, is trading at a P/E of 22. Assume the companies have a similar operating and financial profile. Required: tock is trading at GH37.50, what does that indicate about its value relative [1.5 marks]