Bank I and bank II have the following information:

Bank I:

Beta of bank Is share is 2

Current annual dividend is $1 per share

Current share price is $20

Bank II

Beta of bank IIs share is 1.5

Current annual dividend is $0.6 per share

Current share price is $10

Required

1. Interpret the beta values. Which share would a risk-averse investor invest his/her money in? Explain why?

2. Given a risk-free rate of 4% and a market portfolio return of 10%, what is the expected return of each banks share?

3. Estimate the price per share for each bank using the zero dividend growth model (the discounting rate is the expected return obtained from 2). Based on the estimated share price, what recommendation would you make to the share investor (i.e., BUY, HOLD, SELL)? Explain why.

4. Assume a constant annual growth rate of 5% to perpetuity for dividends, what is the estimated price per share for each bank? Based on the estimated share price, what recommendation would you make to the share investor? Explain why.

5. Assume that the mean of P/E (i.e., share price/earning per share) in the banking sector is 15 and that EPS (i.e., earning per share) next year is $1.3 for bank I and $0.7 for bank II, what is the estimated price per share for each bank using the earnings capitalisation model? Based on the estimated share price, what recommendation would you make to the share investor? Explain why.