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You have some money to invest for 12 months and you are considering purchasing some shares in either company A or company B. After reviewing

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You have some money to invest for 12 months and you are considering purchasing some shares in either company A or company B. After reviewing the historical performance and future prospects for both companies you have prepared the following information Current share price: $1.30 Dividend per share just paid: $0.065 Expected growth rate of dividends: 5% p.a. Current beta: 1.10 Share A Probability of Return 0.25 0.40 0.35 Return over next 12 months 3% 9% 16% Current share price: $1.90 Dividend per share just paid: $0.025 Expected growth rate of dividends: 6% p.a. Current beta: 0.60 Share B Probability of Return 0.20 0.30 0.30 0.20 Return over next 12 months 0% 7% 12% 20% Current risk free rate of return: 3% pa Current market premium: 7% pa REQUIRED (a) On the basis of your predictions of returns from each share over the next 12 months calculate your expected annual return for each share. (6 marks) (b) Calculate the return you should require for each share. (3 marks) (c) Draw a graph of the security market line and, based on your answers above, plot shares A and B on the graph. (4 marks) (d) On the basis of your graph in (c) identify which shares you would buy or sell and briefly explain the reasons for your choice. (4 marks) (e) Calculate the price you would be prepared to pay for each share. (4 marks) (1) On the basis of your answer in (e) identify which shares you would buy or sell and briefly explain the reasons for your choice. (4 marks) (g) Briefly detail the implications arising from your answers above for the operation of the sharemarket. (3 marks) You have some money to invest for 12 months and you are considering purchasing some shares in either company A or company B. After reviewing the historical performance and future prospects for both companies you have prepared the following information Current share price: $1.30 Dividend per share just paid: $0.065 Expected growth rate of dividends: 5% p.a. Current beta: 1.10 Share A Probability of Return 0.25 0.40 0.35 Return over next 12 months 3% 9% 16% Current share price: $1.90 Dividend per share just paid: $0.025 Expected growth rate of dividends: 6% p.a. Current beta: 0.60 Share B Probability of Return 0.20 0.30 0.30 0.20 Return over next 12 months 0% 7% 12% 20% Current risk free rate of return: 3% pa Current market premium: 7% pa REQUIRED (a) On the basis of your predictions of returns from each share over the next 12 months calculate your expected annual return for each share. (6 marks) (b) Calculate the return you should require for each share. (3 marks) (c) Draw a graph of the security market line and, based on your answers above, plot shares A and B on the graph. (4 marks) (d) On the basis of your graph in (c) identify which shares you would buy or sell and briefly explain the reasons for your choice. (4 marks) (e) Calculate the price you would be prepared to pay for each share. (4 marks) (1) On the basis of your answer in (e) identify which shares you would buy or sell and briefly explain the reasons for your choice. (4 marks) (g) Briefly detail the implications arising from your answers above for the operation of the sharemarket

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