QUESTIONTWO [20] EFM[AUG2021]

2.1 Dove Ltd pays 40% of its earning in dividends and its latest earnings announced. were R10 per share. The company expects to earn a return on equity (REO) of 20% per year in all reinvested earning forever. Doves beta coefficient is 1.2, the risk free is 8% and the expected return on the market portfolio is 15%. Calculate the intrinsic value of Doves share? (6)

2.2 Consider the following expectation an Investment.

Economic conditions Probability Expected return Boom 0.30 44% Normal 0.40 14% Recession 0.30 -16%

Required:

2.2.1 Calculate the expected rate of return of this investment. (7)

2.2.2 Estimate the overall risk (standard deviation) of this investment. (7)