Question 9.RQ.21: The following facts are available: • Risk-free rate, 9 per c......

Management Accounting and Financial Analysis for CA Final Examination [995093]

The following facts are available:
$\quad \bullet$ Risk-free rate, 9 per cent
$\quad \bullet$ Required rate of return on market portfolio, 18 per cent
$\quad \bullet$ Beta coefficient of the shares of ABC Ltd, 1.5
$\quad \bullet$ Expected dividend during the next year, Rs 3
$\quad \bullet$ Growth rate in dividends/earnings, 8 per cent
Compute the price at which the shares of ABC Ltd should sell

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$P_o = D_1/(r - g) =$ Rs 3/(0.225 – 0.08) = Rs 3/.0.145 = Rs 20.7
Working note:
$r = r_f + b\, (r_m – r_f) =$ 0.09 + 1.5 (0.18 – 0.09) = 0.225

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