Question Four

A company's equity has beta 1.2. The risk-free rate is 3%, and the average return on the market portfolio is 7%. Answer the following questions:

1. The current dividend yield is 4%. Investors discount into the share price a sustainable growth rate in the dividend payments of . What is your estimate of ? (10 marks)

2. The current payout ratio is 0.6, expected to remain constant in the foreseeable future. Next year the firms earnings per share are expected to be 10. What is the expected price per share next year? (10 marks)