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 PEO. 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 long-term riskless rate is 3.5 %

Market risk premium is 5%

Assuming that PEO's has an estimated systematic risk of 1.10

The constant growth rate is 3.8%

• Recent dividend per share (DPS) is $0.80. This growth rate is expected to remain constantfor the foreseeable future.
• PEO's current stock price is $15.97

Required:

(a)Estimate the company's cost of equity capital using CAPM.(3 marks)

(b)Define unsystematic risk and the security market line (SML). (2marks)

(c)Estimate the current price of the company's shares. (3 marks)

(d)IsPEO's shares overpriced, underpriced or correctly price and why?(3 marks)

(e)State clearly any limitations and assumptions that you made in your calculations. (2 marks)