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Exercise. Analysing Securities Information. The risk-free rate of return (re) is 2% and the expected market rate of return (rm) is 10%. The shares A,
Exercise. Analysing Securities Information. The risk-free rate of return (re) is 2% and the expected market rate of return (rm) is 10%. The shares A, and B, both pay a dividend (D) of $6 a year. The betas for the two shares are BA = 0.75 and 38 = 1.25. The two shares are trading at the same price (P) of $60. Requirements. Answer the following questions: Q1. What are the expected returns on A and B? Q2. What are the expected prices of A and B? Q3. What action would you recommend for A? Q4. What action would you recommend for B? Q5. What would be the expected price of A if its dividend were $8? E(P) E(r) Decision A(P) Buy Hold A AUSTRALIAN INSTITUTE Sell Exercise. Analysing Securities B EO D EP) Sec A 0.75 2% $6 0.02 0.10 ? Sec B 1.25 $6 $? E) = 1 + (rm - r.) B $? AP $60 $60 Action ? ? 7% E(P) = D/E)
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