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 MGT201 2ND GDB SOLUTION

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PostSubject: MGT201 2ND GDB SOLUTION   Tue Jun 22, 2010 10:12 pm

A year ago, you have purchased
some stock with beta of 0.6. You have not noticed how well your stock has done
during the year, but you do know that the T-bills rate has remained 10%
throughout the year. As you are reading the financial journal, you have noticed
that the market risk premium for average stocks is 5 % during the year. Given
only this information:



a)
What do you require the return on
your stock?



b)
Comment whether you will still
hold the stock, if the market return is 15%?



Suggested Solution


(Q1)





Formula For ROR


ROR = Ks = Krf+B*(Km-Krf)





Where Ks=Required Rate of Return


Krf = Risk Free rate (Here T Bills are
considered Risk Free)






B = Beta
(0.6)



Km = Expected market Rate of return of
overall stocks



Risk Premium = (Km-Krf)=5%


Or you may also interpret it as


Km = Risk Premium+risk Free


Km = 0.05+0.1 = 0.15


Now


Risk Premium = (Km-Krf) = 0.15-0.1 = 0.05


Note But risk premium is given 5 % So take it
Directly in (km-Krf) Because if will not
take it directly calculation will difficult so make it simple and easy



Now


Ks = Krf+B*(Km-Krf)


Ks = 0.1+0.6*(0.05) = 0.1+0.03 = 13%


So it has been proved that ROR is
13 %



(Q2)


In my point of view The Market rate
return on stock is 15% and Required Rate of Return on Stock is 13% so Market
Rate of Return is greater than Required Rate of Return So I will Not hold The
stock. Because I receive 2% extra than my requirement and there are also
possibilities that in future (Long Run) high risk is always involved so The
Stock value may fall in the future.


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moni



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PostSubject: Re: MGT201 2ND GDB SOLUTION   Wed Jun 23, 2010 10:35 am

plz send me the slution of GDB FIN 623,FIN630,MGT613
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