Question

U IMU e UxPUTUU SUUR PICU III a year UMI HUW. 2. You have $1,000,000 and you want to create a portfolio with portfolio beta of 1.4. Given the information below, how much money will you invest in Stock C? Asset Investment Beta Stock A $200.000 0.5 S300.000 2.4 You are muted. Press Alt+A to unmute your microphone, or 1.2 press and hold the SPACE key to temporarily unmute. TOTUOLO 3. Leahy Enterprise just paid its dividend of $2 per share. The dividend is expected to grow 20% in a year, 15% in two years from now, and then 5% per year thereafter. Assume the required rate of return is 15%. Find the current intrinsic stock value of Leahy.

Answer 1

Part 2

The beta of a portfolio is the weighted sum of the individual asset betas.

Lets assume investment in C is 'x'

	Amount	Beta
A	200000	0.5
B	300000	2.4
C	x	1.2
Total	500000 + X

Hence, Portfolio Beta is weighted average of stock beta

Hence, 1.4= (200000* 0.5 + 300000* 2.4 + 1.2 * X) / 500000 + X

We solve for X, we get X = 600,000

Hence Investing in C amounting to Rs. 600,000 our portfolio beta would be 1.4

Part 3

We need to find the intrinsic value of stock.

• We use the dividend discount model. We discount the future dividend to present value.

Dividend Y1 = 2 *1.20 = 2.4

Dividend Y2 = 2.4*1.15 = 2.76

Dividend Y3= 2.76 *1.15 = 3.17

• Value of Share at end of year 3 we calculate using Gordon Growth Model

For Dividend to be received in perputuity with certain growth we use GGM

Price = Dividend (1+ Growth) / Ke- Growth

= 3.17 (1.05)/ 15%-5%

= 33.33

• Now we discount all the 3 dividends and Year 3 Share Price to present Value.

We calculate Discount Factor for each year as follows:

1/ (1+r)^N i.e for year 2; 1/ 1.15^2 = 0.756

Multiply DF of each year by respective year cash flows:

Year	Amount	DF	PV
1	2.4	0.869565	2.086957
2	2.76	0.756144	2.086957
3	3.17	0.657516	2.084326
3	33.33	0.657516	21.91502
	Total		28.17326

Intrinsic Value of Share is $28.17