Question

# Question two Discuss the statement that wealth maximization is a better corporate objective than profit maximization....

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

 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.

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