QUESTION 5 (15 Marks)

5.1. Consider the information provided below which relates to a security analysts expected return on two stocks for two particular market returns at the beginning and the end of a trading week in January 2023.

INFORMATION

Period	Market return	Aggressive stock	Defensive stock
At the begging of the week	8%	5%	3%
At the end of the week	20%	22%	11%

REQUIRED:

5.1.1. Calculate the betas of the two stocks? (4 marks)

5.1.2. What is the expected rate of return on each stock if the market return is equally likely to be 8% or 20%? (4 marks)

5.2. You are a consultant to a large manufacturing company that is considering an investment project with the following net after-tax cash flows:

Year from Now	After-tax Cash flow (in millions of Rands)
0	-200
1 - 9	100
10	200

REQUIRED:

The projects beta is 1.7. If the risk-free rate r_f is 9% and the expected market return E(R_m) is 19% what is the net present value of the project? (7 marks)