1. XYZ Ltd has an equity beta of 1.30, market risk premium is expected to be 6%,

and the yield on government bonds is currently 9%. XYZ Ltd issued bonds (R100

par value) that are currently trading at R80 and have an 8% coupon rate. The

corporate tax rate is currently 28% and the maturity date of the bonds is in five

years.

2.Using the CAPM, calculate the cost of equity and the markets overall expected

rate of return (Rm). Thereafter, interpret these values.

3. Consideringyouranswersonthetwoquestionsabove,discussthemain

differences between the CAPM and dividend growth model.