Western Entertainment Ltd has a beta of 1.20, the risk-free rate of return is currently 10% and the required return on the market portfolio is 14%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2001-07 period, when the following dividends were paid:

YearDividend per share

2007 current.$2.45

2006$2.28

2005$2.10

2004$1.95

2003$1.82

2002$1.80

2001$1.73

i) Use the CAPM to determine the required return on Western Entertainment's shares.

ii)Using the constant growth dividend valuation model and your finding in (i), estimate the value of Western Entertainment's shares. If you do not have the answer for part (a) use 15%.

iii)Explain what effect, if any, an increase in beta would have on the value of Western Entertainment's shares.