Reference no: EM132717222

SHYAMULU RAO'S INVESTMENT DECISION

• Ashoka Infotech Ltd is a new company. It has come up with the initial public issue. The issue price of the share is Rs 20 and the par value is Rs 10. Shyamulu Rao, a prospective investor, is considering investing Rs50,000 in Ashoka Infotech's shares. He is not sure about the returns from his investment. His required rate of return is 15 per cent. Since Ashoka Infotech is a new company, he would like to hold the shares for 10 years before he sells them. As regards the dividend payment by the company, he visualizes four possibilities. First, the company may reinvest all its earnings and may not pay any dividend. Second, the company may pay a constant dividend of Rs 3. Third, the company may start with a dividend of Rs 1 per share, which may grow at a constant rate of 10 per cent. Fourth, the company may start paying a dividend of Rs 1.6 per share, which may grow at 15 per cent for the first five years and at 10 per cent thereafter. Shyamulu expects different share prices after 10 years under the four alternatives. The expected earnings per share in year 1 in the normal situation will be Rs 3.

• Shyamulu Rao can also invest his money in bonds. A government-owned financial institution is offering Rs10,000 face value bonds with 10-year maturity at Rs 2,720. He is also considering bonds issued by Reliable Fertiliser Company. These are 15 per cent, Rs 1,000 bonds with 10-year maturity. The company will redeem bonds at Rs 1,100 on maturity.

Problem 1. How much would be Shyamulu's return if he invests his money in Ashoka Infotech's shares?

Problem 2. What would be his return from the bonds of the

(i) financial institution and

(ii) Reliable Fertiliser?

Problem 3. What should Shyamulu do?