Question Tag: CAPM

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  • 8 Marks

FM – May 2016 – L3 – Q6b – Investment Appraisal Techniques

Calculating the betas, required rates of return, and stock prices for three securities based on market data and forecasts.

The expected return on the market portfolio (estimated from past data) is 12% p.a. with a standard deviation of 15% and the risk-free rate of 4% p.a. The actual prices, last year dividends, and the covariances from three securities (A, B, C) with the market are given in the table below:

Security Actual Price (N) Last Year Dividend (N) Covariance with Market
A 107 1.30 0.025650
B 618 18.00 0.018675
C 1,350 22.00 0.029025

You are required to:

i.

Calculate the betas and the required rates of return of securities A, B, and C. (3 Marks)

ii.

In the table below, you have the market consensus forecast of 12-month price targets, ex-dividends, and the expected dividend growth rate of the securities.

Security 12-month price target (N) Dividend growth rate (%)
A 122.50 12
B 740.00 10
C 1,500.00 11

Assuming the dividends are paid in 12 months exactly, compute the required stock price for the 3 stocks and state your conclusion. (4 Marks)

iii.

Considering the results in (ii) above, explain briefly what will be your strategy? (1 Mark)

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  • 15 Marks

FM – Nov 2016 – L3 – SC – Q5 – Portfolio Management

Assess CAPM's basic assumptions and determine overvalued securities among four companies using CAPM metrics.

a. Capital Asset Pricing Model (CAPM) is an equilibrium model of the trade-off between expected portfolio return and unavoidable risk.
What are the basic assumptions on which this model is based? (6 Marks)

b. Currently, the rate of return on the Federal Government Bond redeemable at par in the year 2018 is 5%. The securities of four companies, Akira Plc., Bombadia Plc., Courage Plc., and Divine Plc., have expected returns of 12%, 9.5%, 10.5%, and 13%, respectively. The average expected return on the market portfolio is 10%, subject to a 6% risk (standard deviation). Other relevant information relating to the four securities of the companies is as stated below:

Company Standard Deviation Correlation Coefficient
Akira Plc 0.080 0.975
Bombadia Plc 0.075 0.640
Courage Plc 0.090 0.740
Divine Plc 0.150 0.680

You are required to show which of the companies is/are overvalued. (9 Marks)

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  • 15 Marks

FM – May 2017 – L3 – Q7 – Investment Appraisal Techniques

Provide background on the Capital Asset Pricing Model (CAPM) and its use in project evaluation.

ou were recently appointed by a major manufacturing company as the senior accountant at one of the divisions of the company, which is located in Makurdi. You have received the following memorandum from the divisional manager:

“I tried to see you today, but you were busy with the auditors.
I have to go to a meeting at the head office on Friday about the new project. We sent to the head office its projected cash flow figures before you arrived. Apparently, one of the head office finance people has discounted our figures, using a rate which was calculated from the Capital Asset Pricing Model. I do not know why they are discounting the figures, because inflation is predicted to be negligible over the next few years. I think that this is all a ploy to stop us from going ahead with the project and let another division have the cash.
I looked up Capital Asset Pricing Model in a finance book which was lying in your office, but I could not make a head or tail of it, and anyway it all seemed to be about buying shares and nothing about our project.
We always use payback for the smaller projects which we do not have to refer to head office. I am going to argue for it now because the project has a payback of less than five years, which is our normal yardstick.
I am very keen to go ahead with the project because I feel that it will secure the medium-term future of our division.
I will be tied up all day tomorrow, so again I will not be able to see you. Could you please make a few notes for me which I can read on the way on Friday morning? I want to know how the Capital Asset Pricing Model is supposed to work, plus any other things which you feel I ought to know for the meeting. I do not want to look like a fool or lose the project because they blind me with science.
As you have probably discovered, I do not know much about finance, so please do not use any technical jargon or complicated maths.”

Required:
Prepare notes for the divisional manager which provide helpful background for the meeting.

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  • 20 Marks

FM – May 2019 – L3 – Q4 – Portfolio Management

Evaluate abnormal returns for shares and bonds, calculate required returns for a pension fund portfolio, and assess its active management strategy.

The managers of a pension fund follow an active portfolio management strategy. They try to purchase shares and bonds that show a positive abnormal return (positive alpha factor in the case of shares). The pension fund is required by law to hold at least 40% of its investments in bonds. N100million is currently available for
investment. Three shares and three bonds are being considered for purchase. The required return on bonds may be measured using a model similar to the capital asset pricing model, where beta is replaced by the relative duration of the individual bond (Di) and the bond market portfolio (Dm) i.e. Di/Dm.

Note: Assume the risk-free rate is 4 percent per year.

Required:

a. Evaluate whether or not any of the shares or bonds is expected to offer a positive abnormal return. (10 Marks)

b. The pension fund currently has the maximum permitted investment in shares and wishes to continue this strategy. It has a market value of N1,000 million and a beta of 0.62.

Required:
Calculate the required return from the pension fund if any shares and bonds with positive abnormal returns are purchased. State clearly any assumptions that you make. (4 Marks)

c. Discuss possible problems with the pension fund’s investment strategy. (6 Marks)

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  • 20 Marks

FM – May 2021 – L3 – Q6 – Portfolio Management

Evaluate Tico Plc’s share price using CAPM, identify potential errors in valuation, and discuss limitations of portfolio theory in physical investment decisions.

Tico Plc is comprised of only four major investment projects, details of which are as follows:

Project % of Company Market Value Annual % Return During Last 5 Years Risk % Standard Deviation Correlation with the Market
1 28 10 15 0.55
2 17 18 20 0.75
3 31 15 14 0.84
4 24 13 18 0.62

The risk-free rate is expected to be 5% per year, the market return 14% per year, and the standard deviation of market returns 13%.

Required:

a. Assume that Tico Plc’s shares are currently priced based upon the assumption that the last five years’ experience of returns will continue for the foreseeable future. Evaluate whether or not the share price of Tico Plc is undervalued or overvalued. (8 Marks)

b. Discuss why your results in (a) above might not correctly identify whether or not the share price of Tico Plc is undervalued or overvalued. (6 Marks)

c. Briefly discuss the key limitations of portfolio theory in the analysis of physical investment decisions in practice. (6 Marks)

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  • 20 Marks

FM – May 2021 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluate financing options for Gap Plc, including rights issue and debt issue, using CAPM, market dynamics, and strategic implications.

You should assume that the current date is 31 December 2019.
You work for Eko Corporate Finance (ECF). One of the clients for whom you are responsible is Gap Plc (GP).

Gap Plc is a listed company and is seeking to raise ₦560 million to invest in new projects during 2020. Currently, Gap Plc is financed by equity. However, at a recent board meeting, the finance director stated that, since other companies in Gap Plc’s industry have average gearing ratios (measured by debt/equity by market value) of 30% (with a maximum of 40%) and an average interest cover of 6 times (with a minimum of 5 times), perhaps the company should access the debt markets. The finance director presented to the board two alternative sources of finance to raise the ₦560 million.

Equity Issue:
The ₦560 million would be raised by a 1 for 2 rights issue, priced at a discount on the current market value of GP’s shares.

Debt Issue:
The ₦560 million would be raised by an issue of 7% coupon bonds, redeemable on 31 December 2029. The yield to maturity (YTM) of the bonds would be equal to the YTM of the bonds of Eko Ventures (EV), another listed company in Gap Plc’s market sector. Eko Ventures has a similar risk profile to Gap Plc and has recently issued its bonds. Eko Ventures’ bonds have a coupon of 7%, will be redeemed in four years at par, and their current market price is ₦110 per ₦100 nominal value.

There were concerns expressed by a number of board members regarding the debt issue since it has been the long-standing policy of the company not to borrow. Their concerns were how Gap Plc’s shareholders and the stock market would react. The company’s cost of capital would increase as a result of the borrowing, leading to a fall in the company’s value.

An extract from Gap Plc’s most recent management accounts is shown below:

₦m
Operating profit 200
Taxation at 20% (40)
Profit after tax 160

Additional Information:

  1. Gap Plc has an equity beta of 1.1
  2. The risk-free rate is expected to be 3% p.a.
  3. The market return is expected to be 8% p.a.
  4. Gap Plc’s current share price is ₦5 per share ex-dividend.
  5. Gap Plc has 320 million ordinary shares in issue.

Required:

a. Calculate, using the CAPM, Gap Plc’s cost of capital on 31 December 2019. (1 Mark)

b. Assuming a 1 for 2 rights issue is made on 1 January 2020:
i. Calculate the discount the rights issue represents on Gap Plc’s current share price. (1 Mark)
ii. Calculate the theoretical ex-rights price per share. (1 Mark)
iii. Discuss whether the actual share price is likely to be equal to the theoretical ex-rights price. (4 Marks)

c. Alternatively, assuming debt is issued on 1 January 2020:
i. Calculate the issue price and total nominal value of the bonds that will have to be issued to give a YTM equal to that of Eko Ventures’ bonds in the above calculation. (5 Marks)
ii. Discuss the validity of the use of the YTM of Eko Ventures’ bonds in the above calculations. (3 Marks)

d. Outline the advantages and disadvantages of the two alternative sources for raising the ₦560 million, discuss the concerns of the board regarding the bond issue (using the gearing and interest cover information provided by the finance director), and advise Gap Plc’s board on which source of finance should be used. (5 Marks)

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  • 30 Marks

FM – May 2022 – L3 – Q1 – Business Valuation Techniques

Estimate VT's valuation using FCFE, CAPM, and terminal value assumptions for three-year cash flow forecasts.

Vico Tony (VT) is a software design company established six years ago. The company is owned by five directors. Since establishment, the company has developed rapidly. VT finds it difficult to obtain bank finance and relies on a long-term strategy of using internally generated funds to finance expansion. The directors are therefore giving consideration to the possibility of floating the company on the stock market. As a first step, you have been appointed by the directors to advise on the current value of the business under their ownership.

The company’s most recent statement of profit or loss and the extracted balances from the latest statement of financial position are as follows:

During the current year:

  1. Depreciation is charged at 10% per annum on the year-end non-current assets balance before accumulated depreciation, and is included in other operating costs in the statement of profit or loss.
  2. The investment in net working capital is expected to increase in line with the growth in gross profit.
  3. Other operating costs consisted of:

  1. Sales and variable costs are projected to grow at 9% per annum and fixed costs are projected to grow at 6% per annum.
  2. The company pays interest on its outstanding loan of 7.5% per annum and incurs tax on its profits at 30%, payable in the following year. The company does not currently pay dividends.

One of your first tasks is to prepare for the directors a forward cash flow projection for three years and to value the firm on the basis of its expected free cash flow to equity. In discussion with them, you note the following:

  • The company will not dispose of any of its non-current assets but will increase its investment in new non-current assets by 20% per annum. The company’s depreciation policy matches the currently available tax allowable depreciation. This straight-line write-off policy is not likely to change;
  • The directors will not take a dividend for the next three years but will then review the position taking into account the company’s sustainable cash flow at that time;
  • The level of loan will be maintained at ₦1.98 billion and interest rates are not expected to change.
  • For estimating the appropriate required return on equity, it is decided to make use of the capital asset pricing model (CAPM). The challenge, however, is that since the company is not quoted, an appropriate beta factor does not exist. You have found a listed company, Konputer Limited (KL) that is into software development. KL is also into computer hardware retailing. It has the following financial statistics:

  • About 60% of the market value of KL is attributed to the software development division, while 40% of the value is attributed to computer hardware retailing. The computer hardware retailing division has an equity beta of 0.8.
  • Risk-free rate is 4% and the market risk premium is 8%.
  • VT has maintained a long-term debt/(debt+equity) ratio of 20%.

Required:

a. Provide an estimate of the appropriate rate of return to be used for the valuation of VT. Round your answer to the nearest whole number. (7 Marks)
b. Prepare a three-year cash flow forecast for the business on the basis described above highlighting the free cash flow to equity in each year. (14 Marks)
c. Estimate the value of the business based on the expected free cash flow to equity and a terminal value based on a sustainable growth rate of 4% per annum thereafter. (Note: Irrespective of your answer in (a), assume required return of 17%). (5 Marks)
d. Advise the directors on the assumptions and the uncertainties within your valuation. (4 Marks)

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  • 20 Marks

FM – May 2023 – L3 – Q2 – Business Valuation Techniques

Analyze AHP’s intrinsic value using fundamental and technical analysis, apply the dividend valuation model, and evaluate EMH implications.

You are a Financial Analyst at Tayo Research Group (TRG). You begin valuing Aba Hotels Plc (AHP), a thinly and infrequently traded stock currently selling at 217 kobo, cum 2021 dividend.

For estimating AHP’s required return on equity, TRG uses the capital asset pricing model (CAPM) approach, but you think its equity beta of 1.20 is not reliable because of the stock’s extremely thin trading volume. You have therefore obtained the beta and other pertinent data for Eko Hotel Plc (EHP) – (See Table 1), a midsized company in the same industry with high liquidity trading on the Nigerian Stock Exchange.

Table 1: Valuation Data for EHP

Parameter Value
Asset beta 0.763
Debt beta 0.150
Debt ratio (D/D+E) 0.60
Effective tax rate (%) 30%

Summarised financial data for AHP is shown below:

Statement of Profit or Loss Account

Year 2019 2020 2021*
Sales (₦’000) 305,500 357,600 409,200
Taxable income (₦’000) 40,500 49,000 56,700
Taxation (₦’000) (14,175) (17,150) (19,845)
Post-tax income (₦’000) 26,325 31,850 36,855
Dividend (₦’000) (9,340) (10,228) (11,200)
Retained earnings (₦’000) 16,985 21,622 25,655

Statement of Financial Position

Year 2021*
Non-current assets (₦’000) 216,800
Current assets (₦’000) 158,000
Current liabilities (₦’000) (104,800)
Net assets (₦’000) 270,000
Ordinary shares (₦0.50 par value) 80,000
Reserves (₦’000) 130,000
15% Bond 2026 (₦100 par value) 60,000

(*2021 figures are unaudited)

Other Relevant Information:

  1. It has been estimated that the debt/equity ratio of AHP is 0.16 and the beta of its debt is 0.2.
  2. The risk-free rate is 12% and the market risk premium is 5%.
  3. AHP has an effective tax rate of 35%.
  4. As a result of recent capital investment, stock market analysts expect post-tax earnings and dividends to increase by 25% for two years and then revert to the company’s existing growth rates.

Required:

a. Stock market analysts sometimes use fundamental analysis and sometimes technical analysis to forecast future share prices.
What are fundamental analysis and technical analysis? (4 Marks)

b. Using the dividend valuation model, estimate what a fundamental analyst might consider to be the intrinsic (or realistic) value of the company’s shares.
Comment upon the significance of your estimate for the fundamental analyst. (12 Marks)

c. Explain whether your answer to (b) above is consistent with the semi-strong and strong forms of the efficient markets hypothesis (EMH), and comment upon whether financial analysts serve any useful purpose in an efficient market. (4 Marks)

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  • 6 Marks

FM – Nov 2016 – L3 – Q5a – Portfolio Management

Explanation of the basic assumptions of the Capital Asset Pricing Model (CAPM).

(a) Capital Asset Pricing Model (CAPM) is an equilibrium model of the trade-off between expected portfolio return and unavoidable risk.

What are the basic assumptions on which this model is based?

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  • 15 Marks

FM – Nov 2023 – L1 – SC – Q7 – Corporate Governance and Financial Strategy

Analyze FP’s dividend payout impact on stock price using forward P/E ratio, ROE, and sustainable growth rate.

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in the share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, its business being relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo any time during the next 3 years. The current share price is 57 kobo, and the capital growth is expected to be constant at 12 percent p.a. in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert, on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of the warrants to exercise them before expiry? What is the minimum annual growth rate of the share price necessary to induce holders to exercise their warrants? (2 Marks)

(Total 15 Marks)

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  • 20 Marks

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

Xeco is considering a N15 million expansion to increase profit before interest and tax by 20%. Financial details for Xeco are as follows:

Item Amount (N’000)
Profit before interest 13,040
Finance charges (interest) (240)
Profit before tax 12,800
Taxation (3,840)
Profit for the year 8,960

Financing Options:

  1. Debt: Issue N15m in 8% loan notes, with each note at a nominal value of N100.
  2. Equity: 1-for-4 rights issue at a 20% discount to current share price (N6.25/share). Xeco has 12 million shares outstanding.
  3. Corporate tax rate: 30%.

Required:

  • a. Evaluate whether Xeco should finance the expansion with debt or equity. (10 Marks)
  • b. Explain the relationship between systematic and unsystematic risk. (5 Marks)
  • c. Discuss the assumptions made by the Capital Asset Pricing Model (CAPM). (5 Marks)

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  • 20 Marks

FM – Nov 2022 – L3 – Q3 – Financing Decisions and Capital Markets

Evaluate the financing structure and calculate required return, WACC, and factors influencing beta.

Zakai (ZK) Plc is a listed company that owns and operates a large number of farms throughout the country. A variety of crops are grown.

Financing Structure:
The following is an extract from the statement of financial position of ZK Plc as at 30 September 2021:

The ordinary shares were quoted at ₦3 per share ex div on 30 September 2021. The beta of ZK Plc’s equity shares is 0.8; the annual yield on treasury bills is 5%, and financial markets expect an average annual return of 15% on the market index.

The market price per preference share was ₦0.90 ex div on 30 September 2021. Loan stock interest is paid annually in arrears and is allowable for tax at 30%. The loan stock was priced at ₦100.57 ex interest per ₦100 nominal on 30 September 2021. Loan stock is redeemable on 30 September 2022.

Assume that taxation is payable at the end of the year in which taxable profits arise.

A New Project:
Difficult trading conditions have caused ZK Plc to decide to convert a number of its farms into camping sites with effect from the 2022 holiday season. Providing the necessary facilities for campers will require major investment, and this will be financed by a new issue of loan stock. The returns on the new campsite business are likely to have a very low correlation with those of the existing farming business.

Required:

a. Using the capital asset pricing model, calculate the required rate of return on equity of ZK Plc as at 30 September 2021. Ignore any impact from the new campsite project. (3 Marks)

b. Briefly explain the implications of a beta of less than 1, such as that for ZK Plc. (2 Marks)

c. Calculate the weighted average cost of capital (WACC) of ZK Plc as at 30 September 2021 (use your calculation in answer to requirement (a) above for the cost of equity). Ignore any impact from the new campsite project. (10 Marks)

d. Without further calculations, identify and explain the factors that may change ZK Plc’s equity beta during the year ending 30 September 2022. (5 Marks)

(Total 20 Marks)

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  • 8 Marks

AFM – Nov 2016 – L3 – Q3a – Sources of finance and cost of capital

Calculate the cost of equity for Sunland Co using the Capital Asset Pricing Model (CAPM) with a focus on deriving beta from industry data.

a) The directors of Sunland Company, a company which has 75% of its operations in the retail
sector and 25% in manufacturing, are trying to derive the firm’s cost of equity. However, since
the company is not listed, it has been difficult to determine an appropriate beta factor. The
following information was researched:

  •  Retail industry – quoted retailers have an average equity beta of 1.20, and an average
    gearing ratio of 20:80 (debt: equity).
  • Manufacturing industry – quoted manufacturers have an average equity beta of 1.45 and
    an average gearing ratio of 45:55 (debt: equity).
  • The risk free rate is 3% and the equity risk premium is 6%.
  • Tax on corporate profits is 30%.
  •  Sunland Co has gearing ratio of 50% debt and 50% equity by market values. Assume that
    the risk on corporate debt is negligible.

Required:
Calculate the cost of equity of Sunland Company using the Capital Asset Pricing Model.

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  • 20 Marks

AFM – Nov 2017 – L3 – Q2 – Sources of finance and cost of capital

Calculation of the cost of capital using the WACC and CAPM methods for a company and discussing when to use the cost of equity or WACC for discounting.

Animal Farm Product Ltd, (AFP), a manufacturer of veterinary medicines for farm animals, wishes to estimate its current cost of capital.

The following figures have been extracted from their most recent accounts:

Other relevant data:

  • The current market value of AFP’s ordinary shares is GH¢12.50 per share cum-dividend. AFP’s beta is 1.4, the risk-free rate is 3%, and the return on the SEC index (the market proxy) is 8%. An annual dividend of GH¢800,000 is due for payment shortly.
  • The 8% debentures are irredeemable and are trading at a current market value of GH¢106.00, a GH¢6.00 premium over their issue price of GH¢100.00. Semi-annual interest of GH¢4 million has just been paid on the debentures.
  • The 6% preference shares are trading at a current market value of GH¢6.00, a GH¢1 above their issue price of GH¢5.00. Interest has just been paid on these preference shares.
  • There have been no issues or redemptions of ordinary shares or debentures during the past five years, and the corporation tax rate remains at 12.5%. Assume that tax relief on the debenture interest arises at the same time as the interest payment.

Required:

a) Calculate the cost of capital that AFP should use as a discount rate when appraising new marginal investment opportunities. (11 marks)

b) Explain when firms should discount projects using:

  • The cost of equity;
  • The WACC instead; and
  • When should they use neither? You may use the information and your results in part (a) as examples. (6 marks)

c) Discuss what type of covenants might be attached to bonds. (3 marks)

 

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  • 3 Marks

AFM – May 2018 – L3 – Q1d – Theories of capital structure

Determining the required rate of return for Lime Spider Ltd’s shares using CAPM.

The market is currently yielding a return of 16% while Treasury bills are yielding 10%. Shares of Lime Spider Ltd have a covariance of 7.5 with the market, while the market has a variance of 4.5.

Required:
Determine the required rate of return for Lime Spider Ltd’s shares

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  • 10 Marks

FM – Nov 2020 – L2 – Q1b – Cost of capital | Portfolio theory and the capital asset pricing model (CAPM)

Calculate the appropriate discount rate for a new subsidiary in the U.S. using CAPM and Modigliani-Miller Proposition II.

The directors of Fameko Ltd (Fameko), a courier delivery services company based in Ghana, are considering a proposal for setting up a subsidiary in the United States of America to provide courier services in North America. The capital of this new subsidiary will be structured as 20% equity and 80% debt.

The directors are not sure of what would be an appropriate discount rate for appraising the North American business. You have been asked to recommend an appropriate discount rate for this project. You have gathered the following information for this exercise.

  • Competition in the U.S. Courier industry:
    The U.S. courier services industry is highly competitive. If Fameko sets up in the U.S., its main competitor will be ExFed Corporation. ExFed’s capital structure is 70% equity and 30% debt.
  • Market risk:
    The following statistics have been computed from historical excess returns on the equity stock of ExFed Corporation and that on the S&P 500 Index (a proxy for the market portfolio):
S&P 500 Index ExFed Equity Stock
Average return 0.0628 0.0321
Standard Deviation 0.1875 0.1521
Sample Variance 0.0352 0.0231
Kurtosis -1.4335 -1.1121
Skewness -0.2178 -0.1601

You analyzed the correlation between the excess returns on ExFed and excess returns on the S&P 500 Index and obtained a correlation coefficient of 0.91.

  • The annual risk-free rate and market return:
    The annual rate of interest on the 10-year U.S. Treasury bond is 2.1%. The expected return on the S&P 500 Index is 7%.
  • Taxation:
    ExFed pays corporate income tax at the rate of 30%. However, the effective corporate income tax rate on profits from Fameko’s North American operations will be 35%.

Required:

i) Compute the equity beta of ExFed. (3 marks)

ii) Derive an appropriate equity beta for Fameko’s U.S. subsidiary. (4 marks)

iii) Using the capital asset pricing model or the Modigliani and Miller Proposition II with tax, compute an appropriate cost of equity for Fameko’s U.S. subsidiary. (3 marks)

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  • 6 Marks

FM – NOV 2015 – L2 – Q5d – Portfolio theory and the capital asset pricing model (CAPM)

Calculate the expected return and the value of shares using the CAPM and the dividend discount model.

 I, me, and myself have shares in a company which paid a dividend of GH₵10 to its shareholders. The shares have a beta factor of 1.2. The risk-free rate of return and the market return are 15% and 20% respectively.

Required:
i. Calculate the return on the shares. (4 marks)
ii. Calculate the value of the shares. (2 marks)

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