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Q3. (a) Eta plc is considering whether or not to acquire another company. It has identified three potential targets: Theta plc, lota plc and Kappa
Q3. (a) Eta plc is considering whether or not to acquire another company. It has identified three potential targets: Theta plc, lota plc and Kappa plc. The expected return from these is 17%, 14% and 10%, respectively. Eta plc's cost of capital is 11%, the risk-free rate is 6%, and the expected return on the market is 12.5%. The following information is also available: Current dividend per share Divided growth p.a. Current share price CAPM beta Theta plc 8 pence 8% 110 pence 1.5 lota plc 7 pence 6% 124 pence 1.1 Kappa plc 3 pence 2% 35 pence 0.98 Which of these companies merits further investigation as an acquisition target based on analysis using the capital asset pricing model (CAPM) alone? How would your answer differ if based on an approach using together CAPM and net present value? [8 mark
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