Nov 2015 Q5 d.
I, me, and myself have shares in a company which paid dividend of GH₵10 to its shareholders. The shares has a beta factor of 1.2. The risk free rate of return and the market return are 15% and 20% respectively.
Required:
i. Calculate the return on the shares (4 marks)
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𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛𝑠 (𝑟)=𝑟𝑓+𝛽(𝑟𝑚−𝑟𝑓)
Where 𝑟𝑓 = 𝑅𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑒𝑡𝑢𝑟𝑛𝑠 ; 𝛽 = 𝐵𝑒𝑡𝑎 𝑓𝑎𝑐𝑡𝑜𝑟 𝑜𝑓 𝑡ℎ𝑒 𝑠ℎ𝑎𝑟𝑒𝑠 ; 𝑟𝑚 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑟𝑒𝑡𝑢𝑟𝑛
∴ 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛𝑠 (𝑟) = 15%+1.2(20%−15%) = 21%
ii. Calculate the value of the shares (2 marks)
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𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝐷/𝑟
𝑊ℎ𝑒𝑟𝑒 𝐷=𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
𝑎𝑛𝑑 𝑟=𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛𝑠
∴ 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 = 10/0.21 = 47.62