Question
Lawrence Industries most recent annual dividend was $1.80 per share (D0 = $1.80). The company expects its dividend to grow at 8% annually for next
Lawrence Industries most recent annual dividend was $1.80 per share (D0 = $1.80). The company expects its dividend to grow at 8% annually for next 3 years, followed by a 4% constant annual growth rate in years 5 to infinity. Market data indicates a beta of 1.25 for Lord of Chips. The expected return on the market portfolio is 9% You are required to; (i) Calculate the required rate of return for Lawrence Industries shares using the CAPM assuming a risk-free rate of 5%. (1 Point) (ii) What is the maximum price per share that Lawrence Industries should set for ordinary shares if the company have plan to make a new share issue? (4 Points)
(iii) If Lord of Chips shares are traded in the market at $38.50 what would be your recommendation to Lawrence Industries on their proposed share issue? Justify your answer. (1 Point) (iv) 'The price of a financial asset in the market is depend on the degree of market efficiency'. Briefly explain the three level of market efficiency. (2 Points)
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