SEMESTER FALL 2011
Investment Analysis & Portfolio management (FIN 630)
Assignment No.02
Due Date: January13, 2012 Marks: 30
Mr. Asad is considering two available securities in market for investment. He is
rational investor and wants to analyze both securities on the basis of fundamentals.
Being a financial analyst you are required to help Mr. Asad in evaluating and
selecting one of the securities. Following are two investment options:
1. Multiline Insurance Company issued Rs. 1,000 par value 15%, 5-year bond.
Bond is issued at premium with annual coupon payments. Required rate of
return for such type of securities is 12%. Return on T-bills is 10%. Rating of
Multiline Insurance Company for the current year is BB. Bond is currently
trading at Rs. 855.
2. IRA Foods and Beverages shares are selling at Rs. 95 per share and company
is paying Rs. 8 per share dividend which is expected to grow at 6% for the
foreseeable future. Dividend payout ratio of the company is higher as
compared to the other companies in the industry. Trading history of the
company's shares on KSE shows an increased demand for the shares.
Investors required rate of return for such type of investment is 14%.
Required:
A. Calculate intrinsic value of Multiline Insurance Company's bond. (4 Marks)
B. Calculate intrinsic value of IRA Foods and Beverages' stock using Dividend
Discount Model. (4 Marks)
C. On the basis of intrinsic value, which security Mr. Asad should select? Give
logical reasoning to support selection. (2Marks)
D. Due to political instability in the country, investors demand higher risk
premium that has increased required rate of return of investors to 16% for
both securities. What will be intrinsic value of bond and share due to change
in required rate of return? (4+4 Marks)
E. What is the volatility/percentage price change of bond due to increase in
required rate of return from 12% - 16%. What does it show? (4 Marks)
F. If it is assumed that Mr. Asad is not willing to take risk and decides to invest
in fixed income security, calculate duration of fixed income security. (8 Marks)
Note: Show complete step-wise working along with formulae;
otherwise marks will be deducted).
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