(Total for Question: 10 marks) Question 3 (10 marks) The table below sets out fo
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(Total for Question: 10 marks) Question 3 (10 marks) The table below sets out four corporate events in relation to a particular firm. Each perio consists of one month. Period Corporate Event Price(5) Price status 3.00 3.12 2.64 1.35 Ex-split 1.20 Ex-dividend Ex-bonus $0.30 per share dividend 1 for 5 bonus 2 for 1 split ?for lorights issue (a $0.50 subscription price 4 Ex-issue a) Calculate the holding period returns for periods 1, 2, 3 and 4, as well as the average (5 marks) calculated in (a) (2 marks) c) If you bought 500 shares at the end of period 2 (after the bonus issue), how many shares holding period return. b) Calculate the geometric monthly return of the 4 holding period returns above. f you bought 500 shares at the end of period 2 (after the bonus issue), how many shares (3 marks) would you have at the end of period 4? (Total for Question: 10 marks)Explanation / Answer
Period 1: Let us assume one invests in 1 share for $3 and during the 1 month period, the person will receive dividend of $0.30 and the closing price is $ 3.12. Hence holding period return = (3.12-3+0.30)/3 = 14%
Period 2: Let us assume one invests in 5 shares for $3.12 price and during the month receives 1 extra shares as part of bonus issue. Hence the total shares are 6 and purchase price is (5*3.12) = $15.6 or per share price of (15.6/6) = $ 2.60. Hence the holding period return = (2.64-2.60)/2.60 = 1.54%
Period 3: Let us assume one invests in 1 share for $ 2.64 ad receives 2 shares for 1 as part of the split. Hence the cost per share will be (2.64/2) = $1.32 and holding period return = (1.35-1.32)/1.32 = 2.27%
Period 4: Let us assume one invests in 10 shares for $1.35 and then purchases 1 additional share as part of rights issue for $0.5. Then total purchase price for 11 shares = (1.35*10 +0.50) = $14 and per share price = (14/11) = $ 1.27. Hence the holding period return = (1.27-1.2)/1.2 = 5.83%
Average return: We will caculate the total return for the four periods and then divide it by 4 to get the average period return. Let us assume that one starts with purchasing 1 share for $ 3 hence initial investment is $3. The person receives $0.30 dividend and after 1 month the price is $3.12. Then this person receives 0.2 shares and now has 1.2 shares at closing price of $2.64. Then the person due to split gets additional 1.2 shares to have a total of 2.4 shares at closing price of $ 1.35. Finally the person purchases 0.24 shares in rights issue at (0.50*0.24) = $0.12 price - hence in the end the total shares will be (2.4+0.24) = 2.64 shares and purchase price (3+0.12) = $3.12 . The final value of 2.64 shares will be (2.64*1.2) = $3.17 . Total return = (3.17-3.12+0.30)/3.12 = 11.22% or average return will be 11.22/4 = 2.80%
Geometric mean : [(1+14%)*(1+1.54%)*(1+2.27%)*(1+5.83%)]1/4 - 1 = 5.80%
If one purchased 500 shares after period 2, then in period 3 they will increase to 1000 and in period 4 another 100 will be added. Hence total shares will become 1100 share.
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