Q1. (25%) Please discuss the process Top-Down Analysis framework and describe ke
ID: 2784092 • Letter: Q
Question
Q1. (25%) Please discuss the process Top-Down Analysis framework and describe key factors in each level to identify the best potential investments. 02. (25%) Please fill numbers (by your choice) in blank (A) through (E) and answer question (F). (G), and (H) Suppose you are ready to invest (A) on common stock of company A four years from now. The end-of-year share prices of stock A for the last three years are $(B)-' $(C)-, $(D)-per share, respectively. Company A has paid 0.2% of its year-end share price as dividend. Suppose you will sell all your investment in stock A at the end of this year at $--(E)--per share Please answer the following questions (with calculation process): (F) What is the total dollar return of your investment? (G) What is the total percent return of your investment? (H) What is the Effective Annual Return (EAR) of your investment? Q3. (25%) Please fill numbers (by your choice) in blank (A) through (D) and answer both question (E) and question(F). You just bought-(A)--shares of stock B at $--(B)_ per share Your initial margin is 50%. Your borrowing rate from your broker is--(C)-%. You sell your stock B shares 6 months later for $--(D)--per share There were no dividends paid (and suppose the prices above are net of commiSsions Please answer question (E) and (F) (with calculation process): (E) What is your holding period percentage return? (F) What is your EAR?Explanation / Answer
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Q1. Top down Analysis Framework
Key factors in each level to identify the best potential investments:
Q2.
Suppose you are ready to invest $1000 on common stock of company A 4 years from now.
Last 3 years end of year stock prices are
B. $150
C. $160
D. $170
per share;
Company A has paid out 0.2% of its end share price (= 0.002 * 170 = $0.34 = 34cents) as dividend
Suppose you will sell at E. $190 per share
F) Return on Investment (ROI) =
Amount invested = $1000
Stocks purchased = 1000/150 = 6.6667
Same number of 6.6667 Stocks sold for 6.6667 * $190 = $1266.667
Dividend received = 34 cents per share, for 1000 shares = 0.34 * 1000 = $340
F) Total $ return = $1266.667 + $340 = $1606.667
G) Percent return:
$1000 - $1606.667
100 - 1606.667 * 100 / 1000
= 1606.667 / 10 = 160.667;
160.667 - 100 = 60.667
= 60.667% = 61%
G) Percent return = 61%
H) Effective Annual Return (EAR) will be more than the actual percent return of 61% due to the quarterly or monthly compounding effect
Frequency of compounding = m = 4
EAR = (1+i/m) ^ m - 1
= (1+.61/4)^4 - 1
= 1.1525 ^ 4 - 1
= 0.8 = 80%
H) Effective Annual return = 80%
Q3)
A) 1000 shares of stock B at
B) $100 per share
C) 7% = 0.07
After 6 months, sell stock for
D) $110 per share
E) Holding period % return = sale price - purchase price / Purchase price
= 110 - 100 / 100 = 10/100 = 0.1 = 10%
F) Effective Annual Return:
As it is for 6 months, we will use half yeary compounding,
(1+0.10/2)^2 - 1 = 0.1025 = 10.25%
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