Calculate actual returns using the dividend discount model, Financial Management

Assignment Help:

You've just won a huge $100 million lottery.  You've decided to invest your winnings in the following way:  $30 million in real estate,  $30 million in  corporate bonds and $40 million in equities.  For the equities you've identified 4 possible investments (A, B, C & D) that interest you.  Based on your level of tolerance for risk,  your equity portfolio needs to have an average beta that is 30% higher than the beta of the market portfolio.

(a) You  invest $5 million  in  investment A which has a beta of 0.6 and $8 million  in B which has a beta of 0.9.   If C has a beta of 1.7 and D  is assumed  to have no risk, then how much would you invest in C & D?

(b) Assume that equities A, B & C are priced correctly.  If the rate of return on D is 3% and the average market risk premium is 4%, what is the rate of return on each of A, B & C?

(c) You've also identified 3 other equities (X, Y & Z).  Calculate their actual returns using the dividend discount model and compare this to their expected returns using CAPM. Which of the investments is (are) correctly priced, underpriced or overpriced? Which one(s) would lie on the SML (Security Market Line), above the SML or below the SML.

807_Calculate actual returns using the dividend discount model.png


Related Discussions:- Calculate actual returns using the dividend discount model

Financial reform, The recent financial reform in the Public Sector that had...

The recent financial reform in the Public Sector that had been implemented in Fiji is essential. Critically evaluate this statement.

Project, AThe project is expected to have an initial outlay of $200million ...

AThe project is expected to have an initial outlay of $200million and generate cash inflows of $64million for the next 12 yearssk question #Minimum 100 words accepted#

Working capital management, Q. Working capital management? Every busine...

Q. Working capital management? Every business needs funds for the two purposes for its establishments and to carry out day to day operations. Long terms funds are required to c

Demerits of pay back method, Demerits of Pay Back Method:- (i) It ignor...

Demerits of Pay Back Method:- (i) It ignores the Cash Flows after the Pay Back Period: - The main shortcoming of this method is that it completely ignores all cash inflows subs

Cost of capital , ABC Ltd. Produces electronic components with a selling pr...

ABC Ltd. Produces electronic components with a selling price per of Rs.100. Fixed cost amount to Rs.2,00,000/- 5000 units are produced and sold each year. Annua

What do you mean by misappropriation of fund, Q. What do you mean by Misapp...

Q. What do you mean by Misappropriation Of Fund? Misappropriation Of Funds allotted for specific works under capital or Revenue demand but the expenditure is incurred for anoth

Operating cycle, what is the applicability of the operating cycle in a vege...

what is the applicability of the operating cycle in a vegetaion farm in Uganda

How does the market determine the fair value of a bond, How does the market...

How does the market determine the fair value of a bond? The fair value of a bond is a present value of the bond's coupon interest payments plus the present value of the face va

What do you mean by account, Q. What do you mean by Account? Account - ...

Q. What do you mean by Account? Account - Formal record which represents, in words, money or other unit of measurement, certainresources, transactions, claims to such resources

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd