Mr. Ahmed hails from a family with sound business background. He wishes to learn about financial investment and he seeks your advice to prepare detailed reports about various aspects of Investment analysis. 1. Mr. Ahmed's preferred company for investing is Sohar Fisheries and the table below captures different scenario about the company in S. (10 marks) A. Calculate the expected return for a share in S (4 marks) B. Calculate the standard deviation of a share in S. (6 marks) Scenario Returns on S if (%) Good Bad Probability of the scenario 0.60 0.40 40 25 2. Now, Mr. Ahmed is also considering diversifying his investment. (15 marks) Expected returns R 10 Company Sohar Fisheries Sohar Poultry Sohar Milk Products Standard Deviations o 7 9 11 15 20 A. Calculate the expected returns for the suggested portfolio. (6 marks) Company Portfolio 1 Sohar Fisheries 50% Sohar Poultry 30% Sohar Milk Products 20% Portfolio 2 40% 20% 40% B. Calculate the Coefficient of variation of shares of Sohar Fisheries, Sohar Poultry and Sohar Milk Products. (3 marks) C. Which company can Mr. Ahmed invest based on Coefficient of variation of shares? justify your recommendation with relevant academic literature related to Portfolio Theory and coefficient of variation of shares by appropriately citing and referencing the literature sources. (6 marks) 3. Mr. Ahmed has approached you to prepare a capital structure analysis. (25 marks) Dubai Mills 1.5 6% Particulars Salalah Mills Equity Beta 1.8 Yield on risk-free government securities 7% Historic premium above the risk-free rate is estimate for shares 5% Estimate of Cost of borrowed money to the company (before tax 8% shield benefits). Market value of the Firm Equity -75% 5% 6% Equity -65% MEC_AMO_TEM_035_02 Page 2 of 11 Principles of Financial Investment (BUSS 23001) - Fall - 2020 - CW 2 (Assignment) - All - QP Debt - 25% 30% Debt -35% 25% Corporation tax You are advised prepare a report as follows, A. Estimate the Equity cost of capital using CAPM for both companies. (4 marks) B. Calculate the cost of Debt after tax for both companies. (4 marks) C. Ascertain an estimate of the weighted average cost of capital (WACC) for both companies. (8 marks) D. Which company is in a better position in terms of capital structure? Justify: (9 marks) 4. Mr. Ahmed having understood the investment principles now wishes to raise funds for his company so he may start investing. He has chosen debt financing and Bonds as his preferred option. (15 marks) A. Discuss Debt financing in the context of Mr. Ahmed's expectations. (3 marks) B. Critically examine the types of Debt Financing. (5 marks) C. Mr. Ahmed is planning for bonds with par value of 1000 OMR with maturity of 4 years. He is proposing a coupon rate of 10% as yield to maturity in that risk class is 11%. How much will one need to pay for this bond? (7 marks) 5. Mr. Ahmed has been gifted the following portfolio by his father. (15 marks) Company Bank Muscat NBO Bank Sohar Bank Dhofar Share price (OMR) 1.000 0.500 2.000 1.500 No. of shares 100 200 400 500 Beta 1 1.3 0.8 0.9 A. Calculate the Beta of Mr. Ahmed's portfolio. (10 marks) B. Prepare an explanatory note about diversifiable risk and undiversifiable risk
