solution

Question 1

1) One of your colleagues has recommended that you buy 10 shares in a certain company, say, ABC Ltd. He tells you that the company has a good track record of paying regular dividend every year and the dividends are likely to grow at a rate of 4% per year on an average for the foreseeable future. The next dividend is expected to be $1.50 per share and the shares are selling in the secondary market for $28.50 per share.

As per your financial plans and life profile, you feel that any risky investment like in shares of a company, should earn at least 9% per annum.

1. Compute the intrinsic value of the share (Intrinsic value of any financial instrument is the value that it should sell for in the market).

2. Will you buy these shares? Discuss your reasons briefly in no more than 50 – 100 words and support your reasoning with relevant computations.

3. What might cause a difference between a share’s intrinsic value and its market price? (100 – 150 words)

Question 2

As an investor, would you rather be in a situation that involves no risk at all? Formulate your response in light of the ongoing pandemic and how it may have affected various type of businesses favorably and unfavorably. How would you classify pandemic risk – systematic or unsystematic. Explain briefly. (200 – 250 words)