Microsoft Word - Portfolio Management - practice questions.docx
Portfolio Management - Practice Questions
Question 1
Question 2
Question 3
AB Ltd is a construction company which is contemplating acquisition of SEMTEC Ltd.
AB Ltd is trying to figure out a fair price that it should offer to purchase SEMTEC Ltd’s
shares. Following information is available in this regard.
All figures in £000
Particulars AB Ltd SEMTEC LTD
Beta XXXXXXXXXX
Interest rate on debt 6% 10%
Weight of debt in capital XXXXXXXXXX
EBIT 1, XXXXXXXXXX
Depreciation 22 8
Amortisation 7 -
Marketing expenses XXXXXXXXXX
Capital expenditure 20 -
Interest expense 82 91
Total cu
ent assets (previous year XXXXXXXXXX
Total cu
ent assets (cu
ent year XXXXXXXXXX
Total cu
ent liabilities (previous year XXXXXXXXXX
Total cu
ent liabilities (cu
ent year XXXXXXXXXX
Cash (previous year XXXXXXXXXX
Cash (cu
ent year) 28 2
Additional information:
• Marginal tax rate = 30%
• Risk free rate = 3%
• Market risk premium = 6%
Use this information to answer the following questions.
a) Required return on equity for AB Ltd and SEMTEC Ltd respectively is;
a. 7.2%; 11.4%
. 6%; 10%
c. 5.1%; 7.2%
d. None of the above
) Weighted average cost of capital (WACC) of both AB Ltd and SEMTEC Ltd
espectively is;
a. 8.32%; 6%
. 6%; 8.32%
c. 7.2%; 10%
d. 6%; 7.2%
Question 4
Suppose your expectations regarding the stock price are as follows:
State of the Market Probability Ending Price HPR (including dividends)
Boom XXXXXXXXXX $ XXXXXXXXXX%
Normal growth XXXXXXXXXX
Recession XXXXXXXXXX5
Compute the mean and standard deviation of the HPR on stocks.