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You are considering the below two shares for your portfolio. Given your cash position, you can only purchase one of the shares. The two shares
You are considering the below two shares for your portfolio. Given your cash position, you can only purchase one of the shares. The two shares have the following characteristics: Mullet Stokes Current share price $3.63 $7.45 Expected dividends per share $0.32 $0.46 Current beta 1.3 1.2 Growth in dividends 2% 3% Mullet Probability of Likely Return over Return next 12 months 0.20 2% 0.50 10% 0.30 18% Stokes Probability of Likely Return over Return next 12 months 0.20 0.25 6% 0.40 12% 0.15 18% -3% Other information: Current risk free rate of return: 2% p.a. Current return on market portfolio: 8% p.a. a) Calculate the expected return AND the required return for each share. These returns should reflect the predictions of returns for the next 12 months and the risk characteristics of the shares. (6 marks) b) Calculate the intrinsic value of Mullet and Stokes shares. (4 marks) c) Which of the shares (if any) would you buy based on your calculations in (a) and (b) above? Explain your reasons. (4 marks)
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