Question

Question two

1. Discuss the statement that wealth maximization is a better corporate objective than profit maximization.
2. Master Boat has issued 1,000 ordinary shares at K1 per share which will later be converted to bonds at a nominal value of K1.2 per share. What will be the price of bonds if they are issued for 5 years with a coupon rate of 10% and yield to maturity of 12% if interest is compounded semi-annually?
3. There are two assets and three states of the economy as shown below:

State of Economy	Probability of state of Economy	Rate of return
		Stock A	Stock B
Recession	0.20	-0.15	0.20
Normal	0.50	0.20	0.30
Boom	0.30	0.60	0.40

1. What are the expected returns and standard deviations for these two stocks?   
2. With an explanation advise which of the two assets you would choose if you were asked to select only one asset that would be appropriate for investment

Answer 1

Expected Return = P1*R1 + P2*R2 + …..+ PnRn
where,
P = probability
R = Rate of Return
For Stock A,
State of Economy	Probability of state of Economy (P)	Stock Ra	Exp. Ret.	R1 - Ra	(R1 - Ra)^2	P*(R1 - Ra)^2
Recession	0.2	-0.15	-0.03	0.4	0.16	0.032
Normal	0.5	0.2	0.1	-0.2	0.04	0.02
Boom	0.3	0.6	0.18	-0.6	0.36	0.108
Total			0.25			0.16
For Stock B,
State of Economy	Probability of state of Economy (P)	Stock Rb	Exp. Ret.	R1 - Rb	(R1 - Rb)^2	P*(R1 - Rb)^2
Recession	0.2	0.2	0.04	0.11	0.0121	0.00242
Normal	0.5	0.3	0.15	0.01	0.0001	0.000005
Boom	0.3	0.4	0.12	-0.09	0.0081	0.00243
Total			0.31			0.004855
Exp Ret (A) R1 =	25%		S.D a=	40%
Exp Ret (B) R2 =	31%		S.D b=	6.97%

Therefore , Expected return is more on Stock B with less volatallity i.e. S.D therefore, Stock B will be advised for the Investment.