MGT201 Assignment No. 2 idea solution

by good luck Sun Jun 12, 2011 7:50 am

Question # 1
Current investigation has gathered the following financial data from ABC Company. You are required to calculate the following:

Bond: Calculate the value of a Rs. 5,000 (par value) bond paying interest at an
annual coupon interest rate of 10% with 10 years maturity and the required return on similar-risk bonds is currently a 12% annual rate paid annually.
Common stock: Company has recently paid annual dividend of Rs.1.50 per common share this year. The Company expects earnings and dividends to grow at a rate of 7% per year for the anticipated future. What required rate of return for this stock would result in a price per share of Rs. 32?

Question # 2
Using the basic equation of capital asset pricing model (CAPM), solve followings for the unknown.
1. Find the risk free rate of return with a required rate of return of 18% and a beta of 1.50 when the market return is 16%.
2. Find the beta for a stock with a required rate of return of 15% when the risk free rate of return and market risk premium are 10% and 2.5% respectively.

(Show complete calculations and provide all formulas as they carry marks)

Last Date of this assignment is June 13, 2011.