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What key advantages and disadvantages are associated with holding companies?

  1. Based on the data below , estimate which of the following investments you expect to lose the most in the event of the general market declined by 10%?

(a)  A RM2,000 investment in A firm,

(b) a RM1,500 investment in B firm, or

(c) a RM1,000 investment in C firm.

Please also show your calculation for justifying your decision.

 

Beta (β) of A = 0.33

Beta (β) of B = 0.95

Beta (β) of C = 1,62

  1. You have RM200,000 to invest in portfolio contains A shares and B shares. You wanted to create portfolio which would have a return of 25%. If the stock A has expected return of 28% and B share has a return of 18%, how much money you would invest in B share. Assuming beta for A is 0.8 and B beta is 1.
  1. Assuming the risk-free rate is 5% and the market rate is 15%. Assuming Sugar Corporation share is trading at 60 dollar. Within a year, the share price would rise to 75 dollar and its dividend yield is 5%. What is the expected beta for Sugar Co. for it to rise to that level?
  1. What key advantages and disadvantages are associated with holding companies? What is pyramiding and what are its consequences?
  1. ABC CO. is considering the acquisition of DEF CO. at a cash price of RM1.5 million. DEF CO. has short-term liabilities of $500,000. As a result of acquiring DEF., ABC would acquire the copyrights of a national best-seller which would provide an estimated cash flow of $300,000 for the next five years. The firm has a cost of capital of 20 percent. What is the approximate net present value of this acquisition?

Solution:

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