QUESTION 1

Dividend RM 2
Growth 5%
Discount rate(ke) 11%
What price should the stock sell?

Po = Do ( 1+ g )
ke -g

= 35.00 (RM)

QUESTION 2

Stock is purchased RM 28.50

Expected return (ke) 12%
Dividend RM 5.40
Growth:
first 2 years 7%
next 2 years 6%
constantly thereafter 5%
What is the value of the stock?

Life Dividend Selling Price

1 5.78
2 6.18
3 6.55
4 6.95
5 7.29 109.41 116.70
6 7.66
QUESTION 3

Company Current dividend Expected growth Required rate

per share rate of dividends of return
Company 1 RM 2.00 5% 10%
Company 2 RM 3.00 3% 7%
Company 3 RM 5.00 2% 6%
Company 4 RM 2.25 0% 8%
Calculate the price of a share of stock for each company

Po = Do ( 1+ g )
ke -g

Company Fair Price(RM)

1 42.00
2 77.25
3 127.50
4 28.13
 DF (12%) PV
0.893 5.159
0.797 4.929
0.712 4.665
0.636 4.415
0.567 66.220
0.507

Intrinsic Value 85.39 (RM)

QUESTION 4

Dividend RM 3.00 per share

Expected growth 3%
Rate of return 10%
What is the price of a share?

Po = Do ( 1+ g )
ke -g

= 44.14 (RM)

QUESTION 5

Risk free rate (Rf) 5%

Market rate (Rm) 9%
Calculate the current price of the following securities.

Retaintion
Dividend
Name Beta EPS ratio =
(DPS)
(DPS / EPS)

A -1.2 2 1.5 0.75

B 0.8 3 2.5 0.83
C 1.2 4 3.5 0.88
D 2.7 5 4.5 0.90
E 4.5 6 6.5 1.08
 ke = Growth % Value (Price)
(Rf+*(Rm-Rf) (RR*ke) (Do(1+g)/(ke-g))

0.2 0.05 10.50

8.2 1.37 0.87
9.8 1.23 0.91
15.8 1.58 0.82
23.0 -1.92 -0.24
QUESTION 6

Futures

Long (buy) 100 contract

Initial margin deposit RM 2,000
Maintenance margin RM 1,500
July 6 (opening price) RM 1785
Round-trip commission RM 4.50 per contract
July 6, 7, 8, 9, 10, 11 and 12 are RM 1762, 1755, 1768, 1749, 1738, 1755 and 1747
Calculate the daily cash flows.Compute the rate of return.

Date Session Broker

6-Jul M $ 1,785.00
E $ 1,762.00
7-Jul E $ 1,755.00
8-Jul E $ 1,768.00
9-Jul E $ 1,749.00
10-Jul E $ 1,738.00
11-Jul E $ 1,755.00
12-Jul E $ 1,747.00
Round Trip Commission

QUESTION 7

Short (sell) 200 contract

Performance bond RM 5,000
Maintenance margin RM 4,500
13/09/2010 (opening price) RM 1580.00
Round-trip commission RM 600
Sept 13,14,15,16,17,18,19,20 and 21 are
RM 1584.0,1582.5,1578.3,1587.3,1592.2,1598.7,1605.9,1587.2,1576.4
Calculate the daily cash flows.Compute the rate of return.
 Date Session Particular
13-Sep M $ 1,285.90
E $ 1,584.00
14-Sep E $ 1,582.50
15-Sep E $ 1,578.30
16-Sep E $ 1,587.30
17-Sep E $ 1,592.20
18-Sep E $ 1,598.70
19-Sep E $ 1,605.90
20-Sep E $ 1,587.20
21-Sep E $ 1,576.40
Round Trip Comission
38, 1755 and 1747

Debit Credit Call Balance

$ 2,000.00
$ (2,300.00) $ 1,800.00 $ 1,500.00
$ (700.00) $ 700.00 $ 1,500.00
$ 1,300.00 $ 2,800.00
$ (1,900.00) $ 600.00 $ 1,500.00
$ (1,100.00) $ 1,100.00 $ 1,500.00
$ 1,700.00 $ 3,200.00
$ (800.00) $ 2,400.00
$ (450.00)
Return $ 1,950.00
Total Call $ 4,200.00

Rate of Return -3574.31

 Debit Credit Call Balance
$ 5,000.00
$ 59,620.00 $ 59,120.00 $ 4,500.00
$ 300.00 $ 4,800.00
$ 840.00 $ 5,640.00
$ 1,800.00 $ 660.00 $ 4,500.00
$ 980.00 $ 980.00 $ 4,500.00
$ 1,300.00 $ 1,300.00 $ 4,500.00
$ 1,440.00 $ 1,440.00 $ 4,500.00
$ 3,740.00 $ 8,240.00
$ 2,160.00 $10,400.00
$ (600.00)
Return $ 9,800.00
Total Call $63,500.00
Rate of Return(%) -3429.66
TC - Return $53,700.00
 QUESTION 8

Speculator purchased 200 call option

Premium RM 0.40 per contract
Strike price RM 7.60

Part A If the spot rate on the date of expiration is RM 6.65 should the speculator exercise the contract or let the o

The speculator should not exercise his or her rights as buying the stock in the market is cheaper com

Part B If the spot rate on the date of expiration is RM 8.65 should the speculator exercise the contract or let the o

The speculator should exercise his rights as the strike price is lower than the market. Hence produc

Part A
Value
Call Contract Premium $ 0.40
Spot Rate $ 6.65
Strike Price $ 7.60
Net Profit/Loss

Part B
Value
Call Contract Premium $ 0.40
Spot Rate $ 8.65
Strike Price $ 7.60
Net Profit/Loss

QUESTION 9

Speculator purchased 200 put option

Premium RM 0.20 per contract
Strike price RM 9.45

Part A If the spot rate on the date of expiration is RM 9.55 should the speculator exercise the contract or let the o
 The speculator should not exercise his rights as the strike price is lower than the market.

Part B If the spot rate on the date of expiration is RM 9.25 should the speculator exercise the contract or let the o

The speculator should exercise his rights as the strike price is higher than the market. Hence produc

Part A
Value
Call Contract Premium $ 0.20
Spot Rate $ 6.65
Strike Price $ 7.60
Net Profit/Loss

Part B
Value
Call Contract Premium $ 0.20
Spot Rate $ 9.25
Strike Price $ 9.45
Net Profit/Loss
ercise the contract or let the option expire.

in the market is cheaper compared to the strike price.

ercise the contract or let the option expire.

n the market. Hence produce opportunity to create profit.

Speculator Seller
200 Units 200 Units
$ (80.00) $ 80.00
$ - $ -
$ - $ -
$ (80.00) $ 80.00

Speculator Seller
200 Units 200 Units
$ (80.00) $ 80.00
$ 1,730.00 $ (1,730.00)
$ (1,520.00) $ 1,520.00
$ 130.00 $ (130.00)

ercise the contract or let the option expire.

than the market.

ercise the contract or let the option expire.

an the market. Hence produce opportunity to create profit.

Speculator Seller
200 Units 200 Units
$ (40.00) $ 40.00
$ - $ -
$ - $ -
$ (40.00) $ 40.00

Speculator Seller
200 Units 200 Units
$ (40.00) $ 40.00
$ (1,850.00) $ (1,850.00)
$ 1,890.00 $ 1,890.00
$ - $ -
QUESTION 10

Put option contract

Premium RM 0.40
Strike price RM 6.60
What is the net profit?

Exercise Price 6.60 6.60 6.60 6.60 6.60

(-) Spot Price 5.70 6.00 6.30 6.60 6.90
Gross Profit 0.90 0.60 0.30 0 0
(-) Premium 0.40 0.40 0.40 0.40 0.40
Net Profit 0.50 0.20 -0.10 -0.40 -0.40

Draw the pay off graph

0.60

0.40
Pay off

0.20

0.00 R
5.70 6.00 6.30 6.60 6.90 7.20 7.50

-0.20

-0.40

-0.60
Spot Rate
 6.60 6.60
7.20 7.50
0 0
0.40 0.40
-0.40 -0.40

Row 14
7.20 7.50
QUESTION 11

Call option contract

Premium RM 0.20
Strike price RM 5.50
What is the net profit?

Spot Price 4.90 5.10 5.30 5.50 5.70 5.90

(-) Exercise Price 5.50 5.50 5.50 5.50 5.50 5.50
Gross Profit 0.00 0.00 0.00 0.0 0.2 0.4
(-) Premium 0.20 0.20 0.20 0.20 0.20 0.20
Net Profit -0.20 -0.20 -0.20 -0.20 0.00 0.20

Draw the pay off graph

0.50

0.40
Pay Off

0.30

0.20
Ro
0.10 w
14
0.00
4.90 5.10 5.30 5.50 5.70 5.90 6.10
-0.10

-0.20

-0.30
Spot Price
 6.10
5.50
0.6
0.20
0.40

Ro
w
14

6.10