Question 1

InSight Investments Ltd. is asked to advise a private investor, Mrs Smith, on investing in a pharmaceutical company called CurCov. InSight's analysts decide to use a two- stage residual income valuation model (RIVM) and the capital asset pricing model (CAPM) to value the stock. Their recent estimate of the expected return on the market portfolio is 7%. The risk free rate is 1% per annum. InSight analysts have collected the following information for CurCov: Beta: 1.30 Current market price per share: 11.0 on the 1st January 2021 Current book value per share: $5.0 on the 1st January 2021 The expected return on equity (ROE) and book value per share at the end of each year between 2021 and 2025 are below: 2021 2022 2023 2024 2025 Book value 5.2 5.5 5.9 6.3 6.7 ROE 30% 25% 20% 15% 16% After 2025, abnormal earnings (RI) are expected to have a constant growth rate of 3%