Risk and return Antique Replicas Ltd has a beta of 1.40, the annual risk-free rate of interest is currently 6%, and the market risk premium is 10%. The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 20112014 period. Year Dividend ($) 2011 0.270 2012 0.295 2013 0.325 2014 0.340 (a) Estimate the value of Antique Replicas Ltd ordinary shares. Hint: Step 1: Find the cost of equity using CAPM formula. Step 2: Calculate the dividend growth rate. Step 3: Calculate the price of ordinary shares using the appropriate formula. (b) A lawsuit has been filed against the firm by a competitor, and the potential loss has increased risk. This is reflected in the firms beta, which has increased to 1.6. What is the estimated price of the shares following the filing of the lawsuit? Assume all other factors remain the same. (Learning Outcome 2c) Hint: Recalculate the new cost of equity using CAPM and recalculate the price of ordinary shares.

Time value of money

You have been given the choice between the two retirement policies described below.

Policy A: You will receive equal annual payments of $10,000 starting 35 years from now for 10 years.

Policy B: You will receive one lump sum of $100,000 40 years from now.

If interest rates are 6% pa, which policy would you choose?

Hint:

Policy A: Calculate the PV of the annuity using formula in module 2 and convert it to present value.

Policy B: Calculate PV of lump sum payable in year 40.