A shareholder of Company B is concerned about the recent performance of the company. She has collected the following financial information.

Year to 31 December		2019	2020	2021
Revenue in 'm		9.4	9.6	10.2
Earnings per share in pence		62.3	67.4	59.4
Dividend per share in pence		34.6	35.6	37.4
Closing ex-dividend share price in		7.2	7.9	6.6
CAPM expected return (%)		10	12	9

The finance director of Company B proposes that it will pay no dividend in 2022, 2023 and 2024. The company will pay a dividend per share of 62 pence in 2025. It will then grow at 4% per year in 2026 and beyond.

The expected cost of equity of Company B is 10% per year for 2022 and onward.

Dividend is paid at the end of each year.

Required

(a) Calculate the dividend yield, capital gain and the total shareholder return for 2020 and 2021. Explain why they are different from the expected return using the CAPM.

(10 marks)

(b) (i) We define the predictive P/E as price at the beginning of the year divided by the earnings for the year. Calculate the average predictive P/E. (3 marks)

(ii) Suppose that we expect the earnings per share for 2022 is 60 pence. What is the expected share price based on the average predictive P/E? (2 marks)

(c) (i) Using the observed growth rate on DPS, determine the expected share price for Company B on 31 December 2021. (4 marks)

(ii) Using the new dividend policy proposed by the finance director, determine the expected share price for Company B on 31 December 2021. (8 marks)

(d) Explain why the observed share price for Company B at the end of 2021 (660 pence) differs from the share price you calculate in (bii), (ci) and (cii). (no more than 500 words)