Question 4

The CEO of All-Funders PLC would like to present the valuation of the business to potential investors. He has made the following estimates concerning the annual returns on the company's assets under possible economic conditions:

Pessimistic Most likely Optimistic

Annual rate of returns (%) 2 5 8

Probability 0.2 0.5 0.3

a. Using the above annual returns distribution for the assets, calculate the

i. Expected rate of return

ii. Standard deviation

iii. Interpret your result for the standard deviation

b. The directors of the company were recently paid a dividend of $5 for each unquoted shares

held. The projected growth rate for dividends is 5% for the foreseeable future. Assuming the expected rate of return in (a)

(i) is the investors' required rate of return, using the dividend discount method, calculate the value for each share price.

c. The CEO was recently informed of an alternative approach to business valuation, using the

Capital Asset Pricing Model (CAPM). She was informed the required return of investors could be determined with the following information:

6-monthUS Treasury Bill rate is 1.88%

The average S&P 500 index return is 9.55%

Equivalent industry beta is 0.88

i. Calculate the required rate of return of investors using the CAPM model.

ii. Using the required rate of return form (c ) (i), calculate the value of each share

d. Discuss THREE advantage of using CAPM valuation over Dividend Discount valuation. (Need academic journals citations and referencing)