The following information regarding two shares- the Erongo Ltd equity share and Cunene Ltd’s equity share. State of the economy Probability _________Returns_________ Erongo Ltd Cunene Ltd Recession 0.3 -8% 3% Moderate 0.5 12% 16% Expansionary 0.2 22% 24% Mr. Huang, a wealthy investor from China has approached you as a finance analyst to advice on these two shares. He is a risk averse investor but is however prepared to spend an amount of N$22 Million dollars. . Required. (a) Using relevant calculations and formulas advise which share Mr. Huang should invest in? (b) Huang has decided that he would substantially benefit if he invests in a portfolio made up of the two assets by investing N$13 200 000 of his money in Erongo Ltd and the remainder in Cunene Ltd. Assuming that the two shares are perfectly negatively correlated. Do you agree that Huang would benefit from forming the portfolio? Motivate with relevant calculations.

The following information regarding two shares- the Erongo Ltd equity share and Cunene Ltd’s equity share. State of the economy Probability _Returns_ Erongo Ltd Cunene Ltd Recession 0.3 -8% 3% Moderate 0.5 12% 16% Expansionary 0.2 22% 24% Mr. Huang, a wealthy investor from China has approached you as a finance analyst to advice on these two shares. He is a risk averse investor but is however prepared to spend an amount of N$22 Million dollars. . Required. (a) Using relevant calculations and formulas advise which share Mr. Huang should invest in? (b) Huang has decided that he would substantially benefit if he invests in a portfolio made up of the two assets by investing N$13 200 000 of his money in Erongo Ltd and the remainder in Cunene Ltd. Assuming that the two shares are perfectly negatively correlated. Do you agree that Huang would benefit from forming the portfolio? Motivate with relevant calculations.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter15: Financial Statement Analysis

Section: Chapter Questions

Problem 66P

See similar textbooks

Related questions

Q: You are an investment adviser. One of your clients approaches you for your advice on investing in…

A: An equity share, also known as an ordinary share, is a fractional ownership that commences the…

Q: You've collected the following information about Caccamisse, Incorporated: $ 280,000 $ 17,700 $…

A: Variables in the questionSales ($)280000Net income ($)17700Dividends ($)6500Total Debt ($)60000Total…

Q: You've collected the following information about Caccamisse, Incorporated: Sales Net income…

A: i Return on equity=Net income / Total equity…

Q: You are the financial manager of a competitive investment company in South Africa. You have been…

A: Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for…

Q: Which of the following has the highest interest rate? Select one: O a. Corporate Bond b. Government…

A: Note: Since you have asked multiple questions, we will solve the first question for you. If you want…

Q: method

A: Minimum regret can be arrived at by: Regret = Best pay off - Payoff received

Q: OT 1oon nased a share Of ABC. com commo stock e For Rs. 45. During the past year the common stock…

A: Given, Buying price = Rs. 45 Selling price = Rs. 85 Dividend per share = Rs. 2.40

Q: The Busby Corporation had a share price at the start of the year of $26.80, paid a dividend of $0.57…

A: Here, Beginning Share Price is $26.80 Ending Share Price is $30.00 Dividend is $0.57

Q: Topic: ISLAMIC INVESTMENT Answer all the following question?. Assume that you are the President of…

A: Amt. in RM…

Q: You obtain the following information about RIO: Estimated earnings growth rate: 11.00%…

A: P/E ratio of Company: P/E ratio=Share priceEPS=$25$1.71=14.62

Q: QUESTION 1 (a) In the context of the Capital Asset Price Model (CAPM): Explain the meaning of…

A: "Hi, Thanks for the question. Since you posted multiple question, we will provide you the answer…

Q: dividend payout ratio for Pink Limited

A: Formula to calculate Dividend payout ratio is given by: Dividend payout ratio = Dividend per share…

Q: The common stock of Placo Enterprises had a market price of $ 9.11 on the day you purchased it…

A: The rate of retrun is calculated with the help of following formula Return on Investment = Dividend…

Q: Your grandmother is considering investing in a large, listed company. She has performed some…

A: Let the average return = Ra Standard deviation = SD Let Rn be the return in year n. R1 = 10% R2 =…

Q: Suppose you had the following propositions of returns from two companies W and Y: Company…

A: An investor should put in the money in the company W because it has more value as compared to…

Q: a. You are contemplating buying stock in JP Morgan Chase (JPM). What pieces of information would you…

A: Information needed to assess fundamental value:1. Sum of discounted future profitsReason - This is a…

Q: You are considering purchasing the preferred stock of a firm but are concerned about its capacity to…

A: The cash distributions that a corporation hands out to its preferential owners are known as the…

Q: You are an investment adviser. One of your clients approaches you for your advice on investing in…

A: Since you have posted a question with multiple sub-parts, we will solve first sub-part for you, To…

Q: You have been asked by your employers to demonstrate your knowledge in business valuation process,…

A: Here, Dividend Paid is GH¢ 250,000 Return to Equity is `12% Risk premium is 2%

Q: You are considering purchasing the preferred stock of a firm but are concerned about its capacity to…

A: The question is based on the concept of calculation of times preferred dividends earned ratio. The…

Q: Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have…

A: According to Gordon's growth model ,Po= wherePo= stock priceDo = current dividend paidg= growth…

Q: The following information relates to three companies in the same industry…

A: The Price-Earnings Ratio: The price-earnings ratio is a relative measure of the company's stock…

Q: You are considering purchasing the preferred stock of a firm but are concerned about its capacity to…

A: The "times preferred earned ratio" is computed to assess how many times company's net income can…

Q: 9. Purchasing shares at Dubai Financial Market is an example of: A. a primary market transaction B.…

A: Option C. a secondary market transaction. Explanation: A secondary market transaction is a…

Q: You are an investment adviser. One of your clients approaches you for your advice on investing in…

A: Given, Meaning of Equity shares, Equity share are also known as ordinary share and are the part of…

Q: Assume you are given the following information for firms A and B: A B D E Price i EBIT No taxes…

A: A replication strategy is a way of trading to determine the value of an asset on the basis of cash…

Q: You are an investment adviser. One of your clients approaches you for your advice on investing in…

A: i) The calculation is: The formulae sheet is shown below: The client should not buy the shares…

Q: You are the financial manager of a competitive investment company in South Africa. You have been…

A: Dividend can be defined as the amount paid by an entity to its shareholders for bearing the risk by…

Q: As an Analyst you were tasked to compute for the Weighted Average Cost of Capital of various…

A: Weighted average cost of capital (WACC) is the average cost of capital of the firm from all sources…

Question

100%

The following information regarding two shares- the Erongo Ltd equity share and Cunene Ltd’s

equity share.

State of the economy Probability

_________Returns_________

Erongo Ltd Cunene Ltd

Recession 0.3 -8% 3%

Moderate 0.5 12% 16%

Expansionary 0.2 22% 24%

Mr. Huang, a wealthy investor from China has approached you as a finance analyst to advice on

these two shares. He is a risk averse investor but is however prepared to spend an amount of

N$22 Million dollars. .

Required.

(a) Using relevant calculations and formulas advise which share Mr. Huang should invest in?

(b) Huang has decided that he would substantially benefit if he invests in a portfolio made up

of the two assets by investing N$13 200 000 of his money in Erongo Ltd and the remainder

in Cunene Ltd.

Assuming that the two shares are perfectly negatively correlated.

Do you agree that Huang would benefit from forming the portfolio? Motivate with relevant

calculations.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Similar questions

You are an investment adviser. One of your clients approaches you for your advice on investing inequity shares of Theta Company. You have collected the following data:Earnings per share last year $6.00Payout ratio 0.40Return on equity 0.30Cost of equity capital 0.20The company plans to increase the payout ratio to 60% from year 5.Required:i) Estimate the price of an equity share of this company using an appropriate dividenddiscount model and advise your client whether they should buy a share of the company.ii) Your client is keen to know whether there are any growth opportunities from theirinvestment. Explain to your client the meaning of this concept using appropriatecalculations.iii) If there are positive or negative growth opportunities, explain the reason for suchopportunities.
LL R You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry, LotsofDebt, Inc. finances its $36.00 million in assets with $33.00 million in debt and $3.00 million in equity. LotsofEquity, Inc finances its $36.00 million in assets with $3.00 million in debt and $33..00 million in equity. Calculate the debt ratio. (Round your answers to 2 decimal places.) LotsofDebt, Inc. LotsofEquity. Ino Calculate the equity multiplier. (Round your answers to 2 declmal places.) Equity multiplier LotsofDebt, Inc. LotsofEquity. Ine. Calculate the debt-to-equity. (Round your answers to 2 declmal places.) Debt-to-equity LotsofDebt. Inc. LotsofEquity, Inc. Mc <. Prev MED Type here to search DOOH F2 F4 F5 F7 F10 F11 F12 PrtScr 8- & 23 24 2 ) 4. 5. 9. 7. 8. %3D } 1
The Busby Corporation had a share price at the start of the year of $26.80, paid a dividend of $0.57 at the end of the year, and had a share price of $30.00 at the end of the year. Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period? О А. 11.94% О В. 12.57% О С. 14.00% O D. 11.26%
You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data: Earnings per share last year $6.00 Payout ratio 0.40 Return on equity 0.30 Cost of equity capital 0.20 The company plans to increase the payout ratio to 60% from year 5. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. Notes: You need to show detailed calculations in order to receive full marks for this question iii)If there are positive or negative growth opportunities, explain the reason for such opportunities.
You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data: Earnings per share last year $4.00 Payout ratio 0.40 Return on equity 0.25 Cost of equity capital 0.20 The company plans to increase the payout ratio to 50% after year 5. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. Note: Use two decimal places in your calculations
You are an investment adviser. One of your clients approaches you for your advice on investing in equity sharesof Alpha Company. You have collected the following data:Earnings per share last year $5.00Payout ratio 0.30Return on equity 0.30Cost of equity capital 0.25The company plans to increase the payout ratio to 40% from year 6.Required:i) Estimate the price of an equity share of this company using an appropriate dividend discount modeland advise your client whether they should buy a share of the company.ii) Your client is keen to know whether there are any positive growth opportunities from theirinvestment. Explain to your client the meaning of this concept using appropriate calculations.
Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each. The dollar- weighted return on your investment is Answers: А. -1.75%. B. 8.00%. C. 4.08%. D. 8.53%. Е. 12.35%.
Your grandmother is considering investing in a large, listed company. She has performed some research on the company and has provided you with the following historical information: Year Return 1 10% 2 17% 3 25% 4 -2% 5 5% She is unsure about this investment as she does not want to earn a return less than 2%. Determine the probability that the share will generate a return less than 2% (rounded to the nearest two decimal places). a. 66.85% b. 9.36% c. 96.00% d. 16.85% e. 33.15%
ASSUME that the one year returns for COMPANY A are still (25%, -15%, 120%, -30%, -45%}. Assume also that you acquired shares in COMPANY B, which has had annual returns over the same period, of: {27; 35%; -10%; 10%; -15%}. What is the correlation between the returns on COMPANY A and COMPANY B shares? Multiple Choice 0.567 - 0.356 0.278 - 0.204 Assume that you own a portfolio comprised of 45% COMPANY A and 55% COMPANY B. What return do you expect to earn next year on this portfolio? Multiple Choice 9.74% 13.58% 10.12% 15.25%
You have the following share price of XYZ. DATE Price 2-Mar-2021 $100 3-Mar-2021 $60 4-Mar-2021 $40 5-Mar-2021 $100 Investor B bought 100 shares of XYZ on 2-Mar-2021 and sold all the shares on 5-Mar-2021. Which answer is the closest value to the arithmetic average rate of return for the investor? A. 20% B. 15% C. 25% D. 0%
You have the following share price of XYZ. DATE Price 2-Mar-2021 $100 3-Mar-2021 $60 4-Mar-2021 $40 5-Mar-2021 $100 Investor C bought 100 shares of XYZ on 2-Mar-2021, bought another 100 shares on 4-Mar-2021 and sold all the shares on 5-Mar-2021. Which answer is the closest value to the dollar-weighted average rate of return for the investor? A. 20% B. 0% C. 15% D. 25%
You are a consultant working with various companies that are considering incorporating and listing shares on a stock exchange. One of your clients asks you about the various acronyms she has been hearing in conjunction with financial analysis. Explain the following acronyms and how they measure different things but may complement each other: EPS (earnings per share), EBITDA (earnings before interest, taxes, depreciation, and amortization), and NOPAT (net operating profit after taxes).