Question 1: Investment in Shares (35 Marks)

Mr Gan is planning to invest in the shares of NWP Holdings Bhd, Ta Win Holdings Bhd and Waja Konsortium Bhd. Particulars of his purchase are as follows

a) NWP Holdings Bhd is selling for RM100 today. It is expected to pay a dividend of $8 per share at the end of the year. Its beta is 1 and assume that the risk-free rate of interest is 8% pa and the expected rate of return is 15% pa.

Required:

Estimate at what price the share is expected to sell for in one years time. (3 marks)

b) TaWin Holdings Bhd has an expected rate of return of 4% pa. The market rate of return is15% pa and the risk-free rate of return is 6% pa.

Required:

i) Estimate what is the beta of the share. (3 marks)

ii) Explain what does beta measure in bi) above and why Mr Gan would consider buying this share if its expected return (i.e 4%) is less than the risk-free rate of return (ie.6%). (7marks)

iii) What cautionary advice would you offer Mr Gan in using Beta to decide if he should buy the share. (4marks)

c) Mr Gan has RM20,000 to invest in Waja Konsortium Berhad. He would like to invest as much as he can in Waja and has opened a margin account with his broker who provided 60% financing and set a maintenance margin of 20%. The current price of the market share is RM20. Mr Gan expects the share price to fall and has placed a market order to short sells his shares today. One month later, Waja paid a dividend of $0.80 per share and the market price rose to $25 per share.

Required:

i) Determine if Mr Gan will receive a margin call and the amount of the margin call if the share price has increases to RM25 per share. (7 marks)

ii) Calculate the rate of return on the investment? (5 marks)

iii) Explain the risk to Mr Gan in taking a short position and how he can minimize this risk with his broker. (6 marks)