Q No 4 Assume you are a portfolio manager at JS Global Capital Ltd. Recently you came across three attractive stocks and want to create a portfolio investment in these three stocks. The details of the stocks are given below:

Company name

Volatility

(Standard deviation)

Weight in Portfolio

Correlation with the market portfolio

Meezan Bank Ltd

0.25

12%

0.40

Lucky Cement Ltd

0.35

25%

0.60

KE Ltd

0.40

13%

0.50

The expected return on the market portfolio is 8% and its volatility is 10%. The risk-free rate based on central bank's discount rate is 3%. (1.5 marks each)

a. Calculate each of the stock's expected return and risk (beta) as compared to the market.

b. What should be the expected return of the portfolio based on values calculated in part a.

c. Calculate the beta of the portfolio? what does it tells regarding the riskiness of the portfolio?

d. Using the values from part c, can you calculate the expected return of the portfolio? Is it similar to your answer in part b? Why or why not?

Q No 5 Fauji Fertilizer Corporation expects to generate following free cashflows in coming 5 years.

Year

1

2

3

4

5

FCF (Rs. Million)

51

70

77

72

80

After this time period, the free cashflows will grow constantly at 3% per year. The firm's cost of capital is 13%. Using the discounted free cashflow model, calculate the following.

a. What is the enterprise value of Fauji Fertilizer Ltd? (2.5 marks)

b. If Fauji Fertilizer have access cash of Rs. 32 million, debt of Rs. 280 million, and the 40 million shares outstanding and trading in the market, what should be the expected share price of Fauji Fertilizer? (2.5 marks)

c. Suppose that the stocks of Fauji Fertilizer are being sold in the market at Rs. 12 per share. Will you buy that stock? why or why not? (1 mark)