1. Calculate the standard deviation of both service providers and interpret which share carries the most total risk? 2. Which cell phone service provider should Mr. Nel invest in from a risk management perspective and why?
RISK & RETURN AND PAYOFF TABLES TUTORIAL
QUESTION 1
Mr. Nel, an entrepreneur who is currently 55 years old, took early retirement from his business which he had started 30 years ago. He still wants to be involved in investments to keep his mind occupied while on “permanent” holiday. While thinking about investment opportunities, he realised that one of his most consistent expenses is his cell phone bill. He has a MTN and a separate VODACOM contract which he pays monthly.
He thought to himself, “Why not invest in the company that I am contributing to on a monthly basis.” He decided to conduct research on the two entities in order to assist him with his investment decision. The following information was gathered regarding the two companies:
VODACOM
Vodacom is a leading African communications group providing mobile communications and related services to 40.4 million customers. Its mobile network covers calls to a total population of approximately 182 million people across five countries: South Africa, Tanzania, the DRC, Lesotho and Mozambique.
MTN
Launched in 1994, the MTN Group Limited (MTN Group) is a multinational telecommunications group offering cellular network access and business solutions. It has mobile licenses across 21 countries in Africa and the Middle East and has more than 98.2 million subscribers.
FINANCIAL INFORMATION
|
|
Vodacom |
MTN |
|
Equity Beta |
1.23 |
1.28 |
|
Telecommunication industry beta |
1.32 |
1.32 |
|
Risk free rate (SA) (10yr bond) |
8.25% |
8.25% |
|
Profit March 2010 |
R19.8 bil |
R46.1 bil |
|
Profit March 2009 |
R22.3 bil |
R48.2 bil |
|
Profit March 2008 |
R21.5 bil |
R44.6 bil |
|
Investment return on JSE portfolio |
19.50% |
19.50% |
|
Total Subscribers |
40.4mil |
98.2mil |
|
SA ARPU* |
R 147 |
R 139 |
Note: ARPU can be defined as Annual Revenue Per User
REQUIRED:
1. Calculate the standard deviation of both service providers and interpret which share carries the most total risk?
2. Which cell phone service provider should Mr. Nel invest in from a risk management perspective and why?
Step by step
Solved in 3 steps
