Question 2
An investor estimates that next year’s net income for Hilary
Pullman Hotel would be RM 8 million. The company has 0.5 million
shares outstanding and decided to pay RM 0.5 million to the
preferred stockholders from its net income. Listed companies
similar to Hilary Pullman Hotel have been recently reported to have
an average price/earnings ratio of 4 times. Given the information,
calculate the expected price of the stock and evaluate the problems
in using Price/earnings ratio method of valuing the shares of a
company.
Question 3
Two securities – PohKeong Gold and Mama Care are currently being considered by Jason. He is considering either to invest 100% in PohKeong Gold or building a portfolio that consist of both security – 60% in PohKeong Gold and 40% in Mama Care. The probability distribution of expected returns of these assets are shown in the following table.
State of Economy, Probability, Return on PohKeong, Gold Return on
Mama Care
Bear, 0.30, 3%, 2%
Bull, 0.70, 18%, 10%
(i) Calculate the expected return for each of the two
alternatives.
(ii) Calculate the standard deviation of returns of the two
alternatives.
(iii) Evaluate the investors decisions, based on the above
calculations
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