Q.1

The pandemic issue due to covid19 has brought many economies at lower ebb. It has created impact on financial and non-financial markets. But the economists are quite hopeful about economic recovery and their estimations are a kind of hope for all investors. Mr. Akhan is quite hopeful about stock market recovery hence he plans to invest 20 percent of his wealth in stock market. With assistance of team he has finalized to choose one of the following options. Kindly help him in making decision:

PSO - Stock

Company is currently undergoing expansion and is not expected to change its cash dividend for the next 4 years the last dividend paid was PKR 3. Having completed expansion targets, higher earnings are expected to result causing a 30% increase in dividends each year for 3 years. After these three years of 30% growth, the dividend growth rate is expected to be 2% per year forever.

Nestle Pakistan - Stock

Company has reputation of having stable dividend policy. Company shall pay dividend PKR 10 in upcoming year. The company follows steady growth of 25% increment in dividend. However, due to covid19 it is expected that this growth shall decline to 7% after 8th year and shall remain so forever.

a.PSO stock and Nestle Pakistan stock are currently selling in market at PKR 60 and PKR 170 respectively. Which stock should Mr. Akhan pick if he plans to make 11% return?

b.How many stocks of best selected stock can be bought if overall wealth of Mr. Akhan is PKR 30,000,000?

c.What would be impact on price of stock if the required rate of return moves to, 12.5 percent, 13.5 percent and 14.5 percent?(Hint: Support your argument with help of graph).

Discuss tax shield and other benefits that firms avail in case of debt financing.