Omair has recently come across some wealth and was wondering whether to buy a land, or invest in financial assets. With these thoughts in his head while driving to LUMS, he suddenly remembered that one of his old friend, Fahad had become a successful financial consultant. Though he hadn't talked to him in 2 years since he moved to Dubai, but he was one person, whose advice seemed valuable.

First thing he did on reaching his office was to call Fahad, and after exchanging pleasantries, had a conversation, of which the transcript is found below:

Omair: You remember that disputed property on Jail road, that finally got cleared by the courts, and we sold it and I am now PKR 20 million richer.

Fahad: That's awesome. Let's go and have JJ's Wehshi Zinger to celebrate.

Omair: Man seriously, not sure, what I should do with it, tell me, should I just buy some land in the new DHA phase and forget about it?

Fahad: Nah, you should have a diversified investment portfolio in financial assets.

Omair: Hmm, doable, so tell me what should I do with PKR 11 million of it? You are a bigshot investment guy but listen I need a 12% return.

Fahad: Alright in that case, let's make a portfolio mix of 2 stocks and treasury bonds. The treasury bonds are giving like an 8 % return. Let me get back to you on the other 2 stocks and portfolio mix.

After putting the phone down, Fahad immediately got working on finding the best solution for Omair, and called in his associate (Zainab) for her opinion. The conversation that took place between Zainab and Fahad is transcribed below:

Fahad: Zainab, Omair is one of my oldest friend, and I can't let him down, what do you suggest? Which two stocks should he put in his money. You are up to date so what's your call?

Zainab: Listen, one safe bet is always to put your money in Wajid Ventures. For last 3 years their stock has been giving returns of 10%, 10%, and 14 % and their perfectly in sync with the market. So that's one company we should go for definitely.

Fahad: That sounds like a good bet. That's great, what about the other one?

Zainab: Well that's a tricky one, I would say the Anusha Traditional Apparels.

Fahad: What? Anusha Traditional Apparels? Never heard of it.

Zainab: Yes that's the whole idea, it's a relatively small firm. They have been in the apparel industry for like 5 years, but it's very recent that they have started getting noticed when they setup their ecommerce platform. Right now it's an all equity firm which has 8 million shares and after a successful IPO in 2019, the shares are trading at PKR 19. And I know for a fact that they are going to acquire a small retail setup of desi wear which will cost them PKR 8.6 million, and easily add PKR 1 million to their income per year indefinitely. And Anusha Riaz who is the CEO is deliberating a recalibration of her capital structure to 20:80 Debt to Equity while executing this deal. The debt can be raised at 9%.

Fahad: That sounds like a plan, but what are their numbers looking like?

Zainab: Well I need to crunch the numbers and thats what Muhammad Hassan Shahid will be working on. But basically, they are expected to give a dividend of PKR 1 coming year (without the news of deal) and their dividend stream is expected to grow at 5%. And on top of it this new deal they will go for full payout of this additional income stream. And I am pretty confident their beta is going to be around 1.2

Fahad: That's great news, and I just heard from our tax consultants, that corporate tax rate has been changed to 36% need to ensure our workings have that. Make sure calculation of Muhammad Hassan Shahid are verified by Salman Khan.

1.Why is it a good idea for Omair to invest in a diversified portfolio of stocks and bonds rather than investing in a single security?

2.For Wajid Ventures, what would be the expected return on our investment? What is the beta of Wajid Ventures?

3.For Anusha Traditional Apparels,

a.What is the cost of capital before the recalibration of their capital structure?

b.What is the new share price after funding the new project with equity only?

c.What is the rate of return after the 20:80 Debt to Equity recapitalization?

d.What is the net present value of the acquisition by recapitalized structure?

4.In what proportions, should all securities be invested to get the desired return for Omair (consider portfolio to have an overall market risk of 86%)? What is the return if investment in all securities is the same? What would be the % of the overall market risk of portfolio with equal investment?

5.If Omair's investment give him the same return till perpetuity, what is the present value of the proceeding he received from disputed land on Jail Road?