Equity markets and stock valuation

Question No 1: (Marks 8)

Al Balushi Oil

Mohhamad Al Balushy the owner of Al Balushi Oil, is evaluating new oil production wells in Eastern part of Oman. Sara Al Farsi, the company’s geologist, has just finished her analysis of the wells site. She has estimated that the well One would be productive for eight years, Two – nine years, Three – ten years. After which the oil will be fully produced. Sara has taken an estimate of the gold deposit to Zainab Al Amri, the company’s financial officer. Sara asked Zainab to conduct an analysis of the new wells (One, Two and Three) and provide her recommendation on whether the company should open a new well and which project is better than others.

Zainab has used the estimates provided by Sara to determine the revenues that could be expected from the wells. She has also projected the expenses of opening the wells and the annual operating expenses. If the company opens well, it will have certain large expenses for the purchase and installation of equipment, and at the end of the project the company will incur some expenses associated with the liquidation of the wells. The expected cash flows each year from the well for project Well One, Well Two and Well Three are shown in the tables.

1. Calculate the payback period, modified internal rate of return (3 methods), net present value, profitability index of proposed projects. Determine which project is better and explain why.
2. Based on your analysis, explain what advantages and disadvantages of each method of evaluating investment projects has.
3. If the company finds financial resources for the development of two wells, which two projects would you recommend. Provided that the required rate of return is reduced by 2%.

* You should describe each step in detail and provide intermediate calculations. Add tables from Excel if necessary.

* Do not delete anything from the Word file.

* Write your answers after each question.

* Be careful when rounding. Leave two decimal places.

Question No 2. (Marks 8)

According to the information on the Excel page (Question 2), answer the following questions:

1. What is the portfolio’s expected return?
2. What is the variance of the portfolio and standard deviation?
3. If you have to choose only one type of securities (stock A, B, C or D) which one will you choose and why? To answer this question, you need to calculate the expected return for each stock and the standard deviation, and compare their values.
4. What is the expected return and variance of a portfolio invested 25% each in A, B, C and D? Will the resulting portfolio structure bring you a higher expected return?
5. How should you change the shares of securities A, B, C and D in your portfolio in order to minimize risk and maximize expected returns? Explain your answers.

* You should describe each step in detail and provide intermediate calculations. Add tables from Excel if necessary.

* Do not delete anything from the Word file.

* Write your answers after each question.

* Be careful when rounding. Leave two decimal places.

Question No 3. (Marks 4)

According to the information on the Excel page (Question 3), answer the following questions:

1. Choose the best company to invest from a list of 10 companies (in Excel page) based on dividend yield, capital gains yield and the required returns on your stocks (based on the dividend growth model). Calculate the required indicators and analyze the results.
2. What will be the share prices of the selected company in 4 years, considering the dividend growth model, if the required rate of return is 10%?

* You should describe each step in detail and provide intermediate calculations. Add tables from Excel if necessary.

* Do not delete anything from the Word file.

* Write your answers after each question.

* Be careful when rounding. Leave two decimal places.