FIN630 Investment Analysis & Portfolio Management Assignment 1 Solution Spring 2014

Assignment Question:

Mr. A, a short period investor, always looks for the stocks offering quick gains in the market. He has now Rs. 100,000 with him and wants to invest in XYZ Company. He has come to know that XYZ Company is going through a difficult financial period. Over the past three years, its stock price has dropped from Rs. 50 to Rs. 20 per share. Throughout this decline, XYZ Company has managed to pay a Re. 1 dividend each year. The company’s management feels that the worst is over and expects the dividends to grow at 6% per year for next three years. Afterwards, they plan to increase it by 9% per year indefinitely. Comparable stocks are returning 13%.
For taking an investment decision, Mr. A relies upon both fundamental and technical analyses. He uses to consult various charts including line chart, to predict the price trends in the shorter period. For that purpose, he has plotted the following line graph by using recent date of historical, current and forecasted prices of XYZ Company’s stock:


a) Compute the value of company’s share now?

b)Do you think that point ‘a’ in graph, it’s a good investment for the short term?

That is should Mr.A buy should buy it with the expectation of selling it in short period.Your opinion should be based on logical reason keeping in view the fundamental analysis  the part a?