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In: Finance

The returns on Amanda Ltd’s share over the past five years are reported in table below:...

The returns on Amanda Ltd’s share over the past five years are reported in table below: Year Return 2016 6% 2017 -12% 2018 16% 2019 38% 2020 11% 6.1.1 Calculate the average return for on Amanda’s share over the five year. (2) 6.1.2 Calculate the variance and the standard deviation of Amanda’s return over this period. (8) 6.2 NEW HOPE stock is expecting a Return On Equity (ROE) of 12%, earnings per share (EPS) of $8 and dividends of $6 per share. NEW HOPE investors require a rate of return of 10%. Calculate NEW HOPE’s expected growth rate, its intrinsic value and P/E ratio. (10).Subject is Investment

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Expert Solution

Avg Ret = SUm [ Ret ] / n

Variance = Sum [ (X-Avg X)^2 ] / n

SD = SQRT [Sum [ (X-Avg X)^2 ] / n ]

Growth Rate = Retention Ratio * ROE

PE Ratio = MPS / EPS

MPS = D1 / ( Ke - g )

D1 = Expected Div after 1 Year

Ke = Required Ret

6.1.1:

Avg Ret = SUm [ Ret ] / n

= [ 6% - 12% + 16% + 38% + 11% ] / 5

= 59% / 5

= 11.8%

6.1.2

Variance:

Year Ret X-Avg X (X-Avg X)^2
2016 6% -0.058     0.0034
2017 -12% -0.238     0.0566
2018 16% 0.042     0.0018
2019 38% 0.262     0.0686
2020 11% -0.008     0.0001
Sum [ (X-Avg X)^2 ]     0.1305
Variance =Sum [ (X-Avg X)^2 ] /n     0.0261

SD :

Year Ret X-Avg X (X-Avg X)^2
2016 6% -0.058     0.0034
2017 -12% -0.238     0.0566
2018 16% 0.042     0.0018
2019 38% 0.262     0.0686
2020 11% -0.008     0.0001
Sum [ (X-Avg X)^2 ]     0.1305
Variance =Sum [ (X-Avg X)^2 ] /n     0.0261
SD = SQRT [ Variance ]     0.1615

6,2:

Retention Ratio = [ EPS - DPS ] / EPS

= [ 8 - 6 ] / 8

= 2 / 8

= 0.25

Growth Rate = Retention Ratio * ROE

= 0.25 *12%

= 3%

D1 = D0 (1 + g )

= 6 ( 1 + 0.03)

= 6*1.03

= $ 6.18

MPS = D1 / [ Ke - g ]

= $ 6.18 / [ 10% - 3% ]

= $ 6.18 / 7%

= $ 88.29

PE Ratio:

= MPS / EPS
= 88.29 / 8

= 11.04 times


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