- 6 Marks
FM – L2 – Q13 – Portfolio theory and CAPM
Question
Unity Ventures have shares in a company which paid a dividend of GH¢10 to its shareholders. The shares have a beta factor of 1.2. The risk-free rate of return and the market return are 15% and 20% respectively.
Required:
(a) Calculate the return on the shares.
(b) Calculate the value of the shares.
Answer
(A). Expected returns $(r) = R_{RF} + \beta (R_M – R_{RF})$
Where:
$R_{RF} =$ the risk-free rate of return
$R_M =$ the average return on market
$\beta =$ the beta factor for the company’s equity shares.
Therefore:
Expected returns $(r) = 15% + 1.2 (20% – 15%) = 21%
(B). Value of shares = D / r
Where D = dividend
Therefore:
Value of shares = 10 / .12 = 47.62$
- Tags: dividend valuation, expected return, share price
- Level: Level 2
- Topic: Business valuations
- Uploader: Samuel Duah