SECTION B (any TWO out of FOUR that make total 20 marks) Question 2 (8 marks) Stocks of Alpha and Beta companies have beta coefficients of 0.50 and 1.50. Explain, briefly, which stock is considered risky. Question 3 (12 marks) An Australia-based fixed-income asset manager is deciding how to allocate money between Australia and Japan. Note that the base currency in the exchange rate quote (AUD) is the domestic currency for the asset manager. AUDJPY 79.25 One-year forward points (mid-market) -301.9 One-year Australian deposit rate 5.00% One-year Japanese deposit rate 1.00% The fixed-income manager also collects the following information and uses it, along with the international parity conditions, to estimate investment returns and future exchange rate movements. Currency Today's one-year Libor Currency Pair Spot rate Today JPY 0.10% USDJPY 81.30 USD 0.10% GBPUSD 1.5950 GBP 3.00% GBPJPY 129.67 If uncovered interest rate parity holds, what would be the closest today's expected value for the GBPJPY currency pair one year from now? Question 4 (8 marks) The estimated betas for Newmont Mining. TerraNova and Dominion companies are 1.10.0.50, and 2.10. respectively. The appropriate risk-free rate is 2.25% and equity risk premium varies between 3% and 5.5%. Calculate the range of required rates of return for three stocks using the CAPM. Explain which stock carries relatively higher risk. Question 5 (12 marks) Thijs Wenneker is a portfolio manager of Netherland-based equity fund. He is currently working on valuation of Felix Ltd., which is Netherland's one of the leading manufacturers of organic chemicals. Thijs concluded that DDM is going to be the most appropriate model to value Felix Ltd. During the last seven years (fiscal year ending 31 December 2010 to fiscal year ending 31 December 2016). the company has paid dividends per share of 2.00, 2.25, 2.75, 3.50, 4.50, 5.75, and 7.25, respectively. These dividends suggest a cumulative average growth rate (CAGR) of just above 20.0%. After some discussions with equity analysts, Thijs decided to employ three-stage DDM with a linearly declining growth rate in Stage 2. This company is considered to be an average growth company, and assumes that Stage I will last 5 years and Stage 2 will last 10 years. Stage 1 growth rate is assumed to be 25%, while stage 3 growth rate is assumed to be only 5%. The required rate of return on equity for Felix Ltd. is estimated to be around 10%. Estimate the current value of the stock
