CAPM, & Stock Q1: HF is small company listed in a junior stock market. Its shares have a beta value of 1.09, the expected market return is 10% and the risk-free return is 4.5%. HF company's dividends is expected to grow at 20 percent for the next five years-initial growth period (IGP). After that, the growth is expected to be 4 percent forever. The dividend just paid was $2 per share. Required: (a) Explain how to measure the unsystematic risk and why is important in investment decision process. (3 marks) (b) Estimate the expected rate of returns using CAPM model. (2 marks) (c) Define and graph the security market line using the data in (b). (2 marks) (d) Estimate the value of HF's shares. (4 marks) (e) State clearly any limitations and assumptions that you made in your calculations. (2 marks) Q2: You have just graduated from MBA program with finance major. Immediately after graduation you have been hired as a financial analyst in a highly prestigious listed company name Cornejo. Your first assignment is to estimate the cost of equity capital and stock price of the company. Your assistant gathered the following information for you: The dividend per share (DPS) record of the company over the last 5 years is as follows: Year Dividend per Share (DPS) t-s 7.80 9.4 10.85 11.2 t-1 11.7 to 10 Risk free rate is 3.5 percent . Market risk premium is 5 percent . Cornejo Co has an estimated beta of 1.10 . The company's dividend growth rate is expected to remain constant for the foreseeable future. t-4 t-3 t-2