Question

Lloyds Ltd., is a publicly listed Australian company that your client is following closely, however your client does not have the requisite skills to evaluate the company and, as such has provided you with sufficient information. The historical price of Lloyds Ltd. is given below. Lloyds Ltd. is closely integrated with the Australian economy and so the rates of return for the Australian economy as a whole can be used in the evaluation process You know that Australian Treasury bills currently pay a return of 4% pa., the stock market return over the same period averaged 10% p.a., and have calculated the standard deviation of the market returns to be 12% pa. Lloyds Ltd. beta is estimated at 1.40 Lastly, you have identified the historical returns and dividends (below) Price S3.60 $3.25 $3.65 $4.50 $4.45 $4.68 $5.21 $6.01 ear Dividend 2009 2010 2011 2012 2013 2014 2015 2016 $0.30 $0.35 $0.45 $0.50 Using the above information, identify whether it is a good idea, for your client, to invest in Lloyds. Explain your reasoning for your decision.

Answer 1

Yes. It is good to invest money in Lloyds stock. The reason is that treasury bill yield 4%. It seems that the risk free rate of return is 4% and the Beta is 1.40 .   

According to the CAPM model, the expected rate of return in Lyoyds is that

E(r) = Rf+ Beta(Rm-Rf) = 4% + 1.40 (10% -4%) = 12.4. The expected rate of return from the Lloyds is 12.4%. It is higher than the market rate of return 10% and the beta value is 1.40 which is risky than the market, but the company gives good rate of return to the investors. The dividend and the stock price of the company follows upward trend from one year to another year. The growth rate of stock is 66.94% when compared 2009 to 2016. The growth rate of dividend is also 66.66%. It is an opportunity for the investor to invest in Llyods stock to reap the benefits of getting higher return.