Query : JNU 2005

[Anjali]

A foreign institutional investor who will settle only for returns in excess of 10% is considering converting dollars into rupees to purchase a stock that is valued at Rs 100 but is expected to appreciate in value to Rs 110 at the end if one year. If the investing entity expects the rupee to depreciate in value from Rs 50 to Rs 52.50 against dollars in that year , it would purchase the stock only if the firm is expected to pay a dividend of :
Rs 3 per share
Rs 2.50 per share
Rs 5 per share
More than Rs 5 per share

[vandita24x7]

2.5 per share

vandita

On 25 Mar 2014 20:20, "Anjali [via Discussion forum]" <[hidden email]> wrote:

A foreign institutional investor who will settle only for returns in excess of 10% is considering converting dollars into rupees to purchase a stock that is valued at Rs 100 but is expected to appreciate in value to Rs 110 at the end if one year. If the investing entity expects the rupee to depreciate in value from Rs 50 to Rs 52.50 against dollars in that year , it would purchase the stock only if the firm is expected to pay a dividend of :
Rs 3 per share
Rs 2.50 per share
Rs 5 per share
More than Rs 5 per share

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NAML

[Anjali]

Explanation ?

[RajEco]

Rs 5 ?

[Anjali]

I have no idea
Please someone help

[vandita24x7]

What i could think of is this... since the rupee depriciates with respect to dollar, so the investment of Rs.100 now becomes worth 105 to the investor. Now since he wants excess 10% return on his investment so 10% of 105=10.5. Per share 10.5/2. Hence he would demand more than rs.5 per share

vandita

On 25 Mar 2014 22:16, "Anjali [via Discussion forum]" <[hidden email]> wrote:

I have no idea
Please someone help

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NAML

[Anjali]

My approach is a little different.
Since value of stock is expected to appreciate to 110 , so return here is 10% , but because of dep it becomes 5% . Here Iam stuck. Please guide .

[Dreyfus]

I m getting option d ie more than 5....as if an investor invests in 1 stock worth Rs.100 is equivalent to $2 and investor will only stick with the investment if only that $2 investment will be in excess of $2.2 after an year which is equivalent to Rs115.5 at Rs52.5/$.
Since stock will appreciate to Rs110 therefore the difference is the required dividend....ie more than 5.5...

[Ashima]

Yes, Its 5.5 exactly. :)

[Anjali]

@ vaibhav ,can you give an easier explanation ?
See value of stock is 100 and its value is expected to appreciate to 110 that is 10% interest . The expected appreciation is 5% , so the net return is 5% , but the investor wants interest in excess of 10% .
So now comes the role of dividend
Iam getting the ans as more than Rs 5 , but not exact 5.5
Please explain

[Ashima]

See Anjali at an exchange rate of 50 the investor will give $2 to but the product. He should get 10% of it, which make 10% of 2=$2.2.

Now, after that he has purchased the exchange rate becomes 52.5. Now in terms of rupees this makes that the investor should earn (if to make 10% profit) is 52.5 x 2.2= 115.5 rupees. But he is earning only 110.

So 115.5-110=5.5 which makes it more than 5.

The company should pay him 5.5 else, he wont invest. :)