Risk and Return

SET A
Problem-1.
You are supplied with the following information of ABC company:
Project-A Project-B
Year CFAT C.E Year CFAT C.E
0 3,00,000 1.00 0 4,00,000 1.00
1 1,50,000 .95 1 2,50,000 .90
2 1,50,000 .85 2 2,00,000 .80
3 1,00.0000 .70 3 1,20,000 .70
Which project should be accepted to the company,If risk free discount
rate is 5%.
Problem-2.
XYZ company is considering two mutually exclusive projects.You
are supplied with following information pertaining tot these
projects,advise the company as to which project should should be
taken up by it:
Project-A Project-B
Year CFAT C.E Year CFAT C.E
0 4,00,000 1.00 0 4,00,000 1.00
1 2,50,000 .90 1 3,50,000 .95
2 2,50,000 .80 2 3,00,000 .85
3 1,50.0000 .70 3 2,20,000 .70

Problem-3.
Sar company is considering three mutually exclusive investment
proposals.
Year Proposal-A Proposal-B Proposal-C
0 (5000) (8000)
(7000)
1 2000 2500 2000
2 2000 2000 2500
3 2000 3000 2500
4 2000 2500 3000
5 2000 3000 1500
6 2000 1000 2000
The company employs the RAD approach to evaluate the risky
project and selects the appropriate required rate of return as follows:
Projected payback period Required Rate of Return
Less than 2 Years 5%
1 to 3 years 8%
3 to 5 years 10%
Over 5 year 12%
You are advised to select the best project for the company.
Problem-4.
The probability distribution of NPVs of two projects are given
below.
Project-A Project-B
NPV Probability NPV Probability
Tk 10,000 .2 tk 0 .1
15,000 .7 20,000 .7
25,000 .1 30,000 .2
Calculate :
i) Expected NPV
ii) Standard deviation of NPV
iii) Coefficient of variation of each project.
iv) Which project do you prefer and why?
SET B
Problem-5.
Determined the total return of bond and common stock the following
information:
Bond Stock (nu
exam 05)
Coupon rate =10% Dividend =tk 2
Face value=tk10000 Purchase price=tk 30
Purchase price =tk 960 Sales price = tk 26
Sales price = tk1020 Time period= 1 year
Time period= 1 year No. of shares =100

Problem-6.
Calculate total return and return relatives for the following assets:
(i)A preferred stock bought for tk 70 per share, held one year during
which tk 5 per share dividend are collected. Sold for tk 63.
(ii) A warrant bought for tk 11 and sold 3 month later for tk 13.
(iii)A 12% bond bought for tk 870 for 2 years and sold tk 930.
Problem-7.
Following are the price and other details of 3 stock for the
year2011.Compute TR and RR:(nu exam 05).
Stock Beging price Dividend Ending Price
A 30 3.40 34
B 72 4.70 69
C 140 4.80 146
Problem-7.
Assume that you purchased 100shares of tk 900 per shares and sold
after one year at tk 960 per share and received tk 20 as
dividend.Calculate:
(i) Total return and
(ii) Return relatives
Problem-8.
Mr. X who is the managing director of Purubi Corporation, bought
some stoct from DSE,for tk 150.Exactly one year later he sold it for
tk 175 per share.Mr,X received a cash dividend of tk 10 per share
during the year.You are required to calculate holding period
return(HPR) and holding period yield(HPY).
Problem-9.
Year 2001 2002 2003 2004 2005
Return(R) 7% 3% -9% 6% 10%
Compute:
i) Cumulative Wealth Index ii) Mean (X) iii) Geometric
mean(GM) iii) Standard deviation(SD)

Problem-10.
The shares Hypothetical company limited has the following
anticipated with associated probabilities:

Returns(%): -20 -10 10 15 20 25 30

Probabilities: 0.05 0.10 0.20 0.25 0.20 0.15 0.05

Determine: (i) Expected rate of return (ii) variance (iii) Standard

deviation.

Problem-11.
ACI has the following dividend per share market price per share for
the period 2002-2007:
Year Dividend(tk) AMP(tk)
2002 1.53 31.25
2003 1.53 20.75
2004 1.53 30.88
2005 2 67.00
2006 2 100
2007 3 154
Required:
i) Calculate the annual arte of return
ii) Calculate the expected rate of return
iii) How risky is the share?

Problem-12.
The following information is available for sock x,y,z.
Sock Bear market Normal market Bull market
Stock-x 15% -12% 16%
Stock-y 20% -8% 25%
Stock-z 25% 10% -10%
Probability .4 .3 .3
Required:
i) Calculate the Expected rate of return for each stock.
ii) Calculate the standard deviation for returns on stocks x,y,z.
iii) Assume you invest your tk 50,000 portfolios into a tk 10,000 in
stock x and rest of them equally invest in stock y and z.What is
expected return on your portfolio?
Problem-13.
Return of 2 securities for last five years are given bellow:
Year 1 2 3 4 5
Stock-A 8% 3% 16% -2% 10%
Stock-B 4% 5% 10% -2% 23%
From the information you are required to calculate:
i) Arithmetic mean.
ii) Covariance between securities A and B.
iii) Standard deviation and variance of two stock.
iv) Correlation between stock A and B>
v) Portfolio return and portfolio standard deviation assuming
a) 60%,40% portfolio weight. b) 75%,25% portfolio
weight.
Problem-14.
 Two assets A and B have the following risk and return :
E(RA) =16% σA = 20% CorAB =.60
E(RB) =12% σB =26%
Determine the risk and return for a portfolio of asset A and B with
following proportions:
Portfolio Proportion-A Proportion-B
a 70% 30%
b 40% 60%
c 20% 80%
d 65% 35%
Problem-15.
An individual has tk 35000 invested in a stock that has a beta of 0.8
and tk 40,000 invested in a stock with a beta of beta 1.4. If these are
the only two investments in her portfolio, What is her portfolios beta?
Problem-16.
Assume that the rsk free rate is 5% and the market risk premium is
6%.What is the expected return for the overall stock market? What is
the required rate of return on a stock that has a beta of 1.2?

Problem-16.
Assume that the rsk free rate is 6% and the expected return on the
market is 13%. What is the required rate of return on a stock that has
a beta of 0.7?

Interest rate and Bond valuation

Problem-1.
Mr. Karim is considering the purchse of a six year tk 100 par value
bond,Bearing a nominal(coupon) rate of interst of 9%.The investors
required rate of return is 10%.What should be willing to pay to
purchsr the bond if itmature at par?The investor will receive csh tk 90
as interst each year for 6year and tk 1000 on maturity?
Problem-2.
Partex Ltd is proposing to sell a 5 years bond tk 1000 at 7% rate of
interst per annum.The bond amount will be amortised equally over its
life.If an investor has a minium required rate of return of 6%,What is
the bonds present value for the invstor?
Problem-3.
A 6 year bond of tk 1000 has an annual rate of interest of 10%.The
intrest is paid half yearly.If the required rate of return is 14%,What is
the value of the bond?
Problem-4.
A bond will pay tk 90 annual interst into perpeatally ,What will be its
value if the current yield is 9%
Problem-5.
A tk 1000 perpetual bond is currently selling for tk 900.The coupon
rate of interst is 12050% and the discount rate is 14%.
Problem-6.
Singer Ltd. issues a zero coupon bond having a 10 year maturity and a
tk 1000 face value.If the required rate of return is 12%,then find the
value of the bond.
Problem-7.
SharInterprise has outstanding a tk 1000 per value bond with an
9%coupon interst rate .The bond has 5 years remaining to its maturity
date.
Requried:i) Fnd the value of bond if interst is paid annually when
required rate of return is 9% and 14% ii) Using the 16% requried rate
bof return find the bonds value when interst is paid quaterly.
Problem-8.
A 12 years bond pays tk 11 per year as interst and tk 100 as principal
repayment after 12 years.If the currentprice of the bond is tk 103.22,
Find the yield to maturity(YTM) by using approximate fomula.
Problem-9.
Beximco Ltd. has issued 5,000 debentures with a total principal value
of tk 50,00,000.The bond have a coupon interst rate of 7%.
(a) What amount of interst per bond can an investorexpect to receive
each year from Beximco?
(b) What is Beximco total interst expense per year asspciated with
thise bond issue?
Problem-10.
A padma industries bond has a 15% coupon rate and a tk 1000 face
value.Interst is paid semi annnually,and bond has 20Years to maturity
.If investors requierd a 10% yeild,What is the bonds value?
Problem-11.
Square Motors bond have 15 years remaining to maturity .Interst is
paid annually,the bonds have a tk 1000 par value and the coupon
interst rate is 8%.The bonds have a yield n maturity of 9%.What is
the current market price ?
Problem-12.
Srma Corporation has issued bonds that have a 10% coupon rate
,payable semi annually.The bond matue in 8 years,have face value of
tk 1000 and a yield to maturity of 12%.What is the price of bonds?

Common stock valuation

Problem-1.
Mr. Abdull Salim is considering the purchse of a prefence share of
azizia Ltd having a maturity peroid of 8 years.Face value of the
prefence share is tk 600 and rate of dividend is 9%.If expected rae of
return is 7%.Calculate the present value of the share.
Problem-2.
Fu-Wang Food Ltd. has a tk 500 irredeemable prefence share on
which it pays a divident of tk 40.Assume that thise type of a prefence
share is currently yielding a dividend of 11%.What is the value of
the prefence share?
Problem-3.
Mr. Kamal in tends to buy a share and will hold it for one year.He
expects the share to pay a dividend of tk 3 next years and would sell
the share at an expected price of tk 33 at the end of the year.If Mr
kamal required rate of return is 16%,how much should he pay for the
share today?
Problem-4.
Mr Jahangir is considering of purchsing a share and will hold it for
2 years.He expect the share topay dividends of tk 3. and tk 3.10 at the
end of fist and second year respectively .The expected selling price of
the share at the end of 2 is tk 25.10.If the opportunity cost is 14%,how
much should Mr. Hasan pay now for the share?
Problem-5.
Sumsang electronices is expected to pay a dividend of tk 7 per share
next year.The dividends are expected to grow constantly at a rate of
9%.If the required rate of return is 12%,Findout the present value of
the share?
Problem-6.
Lexo lether company has a book value per share of tk 180.Its return
on equity is 13%and it follows a policy of retaining 50% of its
earning . If the required rate of return is 15%, Findout the present
value of the share?
Problem-7.
You are given:EPS =tk 30
Retaintion ratio(b) =40%
Ke =12%
Return on equity =20%
Calculate price of the share.
Problem-8.
The current price of Acme Ltd. share is tk 90.The company is
expected to pay a dividend of tk 6 per share increasing with an
annuall growth rate b of 6%.If an investors required rate of return is
12%,should he buy the share?
Problem-9.
BD Foods Ltd follows a policy of 70% payout ratio.The opportunity
cost is 15%.If the expected earning per share for the 1st year is tk 20
and growth rate of dividend is 5% for next 6 years.Calclute the price
of the share.
Problem-10.
Mr. Mamun has invested in Bata Ltd..The capitalisation rate is 12%
and the current dividend is tk 2 per share. Calculate the value of the
company equity share if the company is slowly sinking with an annual
decline rate of 3% in the dividend.
Problem-11.
Mr. Milon Uddin at present earns tk 6 per share .Rate of return on
equity is 25% and Mr Milon retains 50% of his earning, the required
rate of return is 15%.What is the intrinsic value of his stock?
Problem-12.
Asraf Textiles equity share currently sells for tk 46 per share .The
company finance manager anticipaties a constant growth rate of
10.50% and an end of year dividend of tk 2050.
(a) What is the expected rate of return?
(b) If the investor requires a 17% return,should he purchase the
stock?
Problem-13.
The Square Ltd had paid the following dividends per share:
Year Dividend per Share
6 tk. 5.60
5 5.16
4 4.80
3 4.48
2 4..20
1 4.00
Assuming a 16% required return and tk 3 per share dividend in year
7.compute the value of the shareof Square Ltd.
Problem-14.
Bangladesh Lampslyd. currently pays an annual divident of tk 18 per
share of common stock.The required rate of return of the common
stock of the company is 12%.Estimate the value of the of the common
stock under assumtions that dividends are expected to grow at an
annual rate of 5% for each of the next 3 years followed by a constant
growth rate 4% from year four to infinity.
Problem-15.
Aziz pipes LTd is a matured firm in Enginering Industries.The firm
recently paid dividend of tk 25 per share.Due to its maturity as well as
stable sales and earings, the firms management feels that the dividend
will remain at the current level for the foreseeable futeure.