Finance Assignment Case Solution
Expected Return of Portfolio
Supposethe investor invests 60% of his funds in investment A and the remainder in investment B. Find the expected return of his portfolio
The investor is scattering hisportfolio to minimize risks and expect better profits. The investor has an aggressive nature of investments. The coefficient of variance for this portfolio is 0.147. Moreover, the investorspends a higherpercentage of amounts on the low volatile investment however, he hashigh risk to return factor. The expected return on portfolio is 13.05%.
Efficient market Hypothesis
It is expected that the market is unbeatable and the market is considered as efficient and investment theory, which supports this stance is called efficient market hypothesis. EMH considers that the current stock prices of the stock could bea sign of its accessible information. There are three forms of efficiency, which are given below:
It is expected that weak form of the efficient market hypothesis considers that the effect of the past rates of return upon the future rates will be minimum and return on the market is also considered as independent and the stock prices also reflect all available information.
It is expected that the semi-strong form efficient market hypothesis also considers that the market is efficient and the stock prices reflect all publically information available and according to this hypothesis, the stock regulates rapidly in order to take up the new information and new stock prices of the company reflect the new publically information available.
In the strong form of efficient market hypothesis, it is considered that the stock reflects both public and private information and this form is considered as the most efficient form of the theory of efficient market hypothesis
The value of the company’s share using the net assets (at fair value) method
The estimated value of the company’s share is $2,800,000. The value is the sum of total shares issued by the company, which comprises of retained earnings and its fair value surplus.
The value of the company’s share using the price earnings ratio
The company has a worth of $3,500,000. The value is calculated by multiplying the P/E multiple with the after tax earnings of the company.
The value of a share using dividend model
The Gordon dividend model was used to determine the value of single share of the company. The no growth in share price will lead the company to a declining value. The value for discount factor is taken as 12% and the growth rate will be stable. The dividend for the first year is $0.3 and the dividends for following years will also be $0.3 per share.
With the discount factor and taking no growth rate, the future worth of the first year will be $0.27 followed by $0.24 and $0.21. The terminal value is calculated from these values, which is $1.78 and as a result the value of share after four years will be $2.50.
The value of a share using the dividend growth model
The assumptions taken in this answer are different from the previous question. The discount is same with a growth of 10% for first three years and 5% from the fourth year. The dividend can be seen at an increasing trend. The dividend for first year is $0.33 followed by $0.36, $0.40 and $0.42. In the fourth year, we assume a growth of 5% that shows that the growth of the dividend is not so good in the fourth year. The terminal is calculated as $4.26 for fourth year’s data. The future value for the first year dividend including the discount rate is $0.29 followed by $0.29 and $0.28. Moreover, the estimated values of a share after four years will be $5.13…………………
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