Question

Question 1: Answer the following sums

1. Fingroup financial institution issued an open-end fund with net asset value of $15.70 per share. It is sold with front-end load of 7.5%. What is the Offer price?

Company	$10 Dollar Store	$20 Everything Store
Forecast return	17%	16%
SD	22%	25%
Beta	1.3	1.0

The data of two companies are given below: The T Bill is 4% and the market risk premium is 9%.                                                                                  

1. Calculate Return for both the companies using Capital Asset Pricing Model.
2. Characterize each of these two companies as underpriced, overpriced or properly priced.   

Answer 1

Here there are two questions . I have answered both of them below:

Ans 1)

NAV = 15.70

Front end load = 7.5% or 0.075

Now,

(1- Front end load) * Offer price= NAV

Or, 0.925 * offer price = 15.7

Hence offer price = $ 16.973

Ans 2 a)

According to the CAPM equation,

Cost of equity = risk free rate + Beta * Market risk premium

For $10 Dollar store company ,

Cost of equity = 4 + 1.3 * 9 = 15.7 %

For $20 Everything store company ,

Cost of equity = 4 + 1* 9 = 13 %

b)

For $10 Dollar store company ,

Cost of equity = 15.7 %

Forecast return = 17%

For $20 Everything store company

Cost of equity = 13 %

Forecast return = 16%

Since for both companies the expected return are higher than the required CAPM return , they are overpriced and the price is expected to come down.