Question 5: Share markets [15 Marks]

Show all your workings when calculations are required and round off your FINAL result to TWO decimal places.

Westfield is a listed company with a beta of 1.3, a current share price of $8 and an EPS of $8. It is expected to pay a dividend of $1/share at the end of year 3 and dividends will grow at a constant rate of 3% per annum forever. The long-term return of the ASX200 (i.e. the market portfolio) is 8% p.a. and the market risk premium is 5% p.a. Eastfield is a competitor company with a share price of $10 and an EPS of $20.

a) Using the P/E ratio, identify the company with cheaper shares and briefly explain why. Ignore risk. [3 marks]

b) Using CAPM, calculate the expected rate of return of Westfield. [4 marks]

c) What is the implied value of a Westfield share today? [6 marks]

d) Given the current share price of Westfield, would you purchase it and why? [2 marks]