JAIPURIA INSTITUTE OF MANAGEMENT, JAIPUR

POST GRADUATE DIPLOMA IN MANAGEMENT

FOURTH TRIMESTER (Batch 2017-19)
END TERM EXAMINATION
Course Name Investment Management Course Code FIN402
Max. Time 2 hours Max. Marks 40

Instructions: Attempt all questions.

Q.1 Your business plan for your proposed start-up firm envisions first-year revenues of
$120,000, fixed costs of $30,000, and variable costs equal to one-third of revenue.

a) What are expected profits based on these expectations?

b) What is the degree of operating leverage based on the estimate of fixed costs and
expected profits?
c) If sales are 10% below expectation, what will be the decrease in profits?
d) Show that the percentage decrease in profits equals DOL times the 10% drop in sales.
e) Based on the DOL, what is the largest percentage shortfall in sales relative to original
expectations that the firm can sustain before profits turn negative? What are break-even
sales at this point? Confirm that your answer to is correct by calculating profits at the
break-even level of sales. (10
Marks)

Q.2 Wilson is now evaluating the expected performance of two common stocks, Furhman Labs
Inc. and Garten Testing Inc. He has gathered the following information:

• The risk-free rate is 5%

• The expected return on the market portfolio is 11.5%
• The beta of Furhman stock is 1.5
• The beta of Garten stock is .8

Based on his own analysis, Wilson’s forecasts of the returns on the two stocks are 13.25% for
Furhman stock and 11.25% for Garten stock. Calculate the required rate of return for Furhman
Labs stock and for Garten Testing stock. Indicate whether each stock is undervalued, fairly
valued, or overvalued. (10
Marks)

Q. 3 The following are estimates for two stocks.

Stock Expected Return Beta Firm Specific

Standard deviation
A 13% 0.8 30%
B 18% 1.2 40%
The market index has a standard deviations of 22% and the risk-free rate is 8%.
a) What are the standard deviations of stocks A and B?
b) Suppose that we were to construct a portfolio with proportions:
 Stock A: .30 Stock B: .45 T-bills: .25
Compute the expected return, standard deviation, beta, and nonsystematic standard deviation
of the portfolio. (10
Marks)

Q.4 You expect the price of IBX stock to be $59.77 per share a year from now. Its current market
price is $50, and you expect it to pay a dividend 1 year from now of $2.15 per share.

a. What is the stock’s expected dividend yield, rate of price appreciation, and holding
Period return?
b. If the stock has a beta of 1.15, the risk-free rate is 6% per year, and the expected rate
of return on the market portfolio is 14% per year, what is the required rate of
return on IBX stock?
c. What is the intrinsic value of IBX stock, and how does it compare to the current
market price? (10
Marks)