Question
(a) Taiko plc has a market capitalization of $30 million and forecast post-tax profits for the forthcoming year of $10 million. The company has an
(a) Taiko plc has a market capitalization of $30 million and forecast post-tax profits
for the forthcoming year of $10 million. The company has an issued share capital of $1 million, which is made up of $050 ordinary shares. The policy of Taiko plc is to maintain a constant dividend cover of 25 times. Dividends are expected to increase by 5% per annum for the foreseeable future.
How much is the expected rate of return from the ordinary shares?
(b) The shares of Donie plc have a beta of 05 and the shares of Alcmene plc have a beta of 20. Investors have an expected rate of return of 4% from shares in Donie plc and the expected returns to the market are 6%.
Using the Capital Asset Pricing Model, what will be the expected rate of return for investors in Alcmene plc?
(c) Pemberley plc pays a constant dividend of 25 pence per ordinary share and the ordinary shares of the company have a beta of 12. The risk-free rate of return is 4% and the current market rate of return is 11%.
How much is the predicted market value of each of the company's
shares?
(d) Lepus plc has issued loan stock of $100 nominal value with annual interest of 10% per year, based on the nominal value. The loan stock has two years remaining before it is redeemed at par. Interest is paid annually and the most recent interest payment has just been paid. Investors currently require a yield
of 8% per year on the loan stock.
How much is the market value of the loan stock per 100 nominal value?
(e) You own a portfolio consisting of the following stocks. The risk free rate is 6% and the market risk premium is 9%.
Stock: ABC
Amount Invested: $25,000
Beta: 0.70
Stock: PQR
Amount Invested: $40,000
Beta: 1.50
Stock: XYZ
Amount Invested: $35,000
Beta: 1.10
(i) Determine the beta of the portfolio
(ii) Using the capital asset pricing model (CAPM), determine the required rate of return on the portfolio.
(iii) The project is expected to earn an annual rate of return of 11%. On the basis of your calculation in part (ii), would you recommend this
investment? Why and why not?
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