8-40 Exercise U Bhd (UB) has just paid a dividend of RMO.50 per share. The company's return on equity (ROE) is 13 percent and its management has planned to retain 20 percent of the earnings fo...

Question

Question

8-40 Exercise U Bhd (UB) has just paid a dividend of RMO.50 per share. The companys return on equity (ROE) is 13 percent and

Answer 1

Answer #1

Risk free rate=rf=6%

Risk premium=RP=7%

Beta=b=1.60

CAPM gives

rs=rf+b*RP=6%+1.6*7%=17.20%

ROE=13%

Retention ratio=20%=0.20

Sustainable growth rate=g=ROE*Retention ratio=13%*0.20=2.60%

Current dividend =Do=RM 0.50

Expected dividend next year=D1=Do*(1+g)=0.50*(1+2.60%)=RM 0.5130

Fair market price of ordinary share=D1/(rs-g)=0.5130/(17.20%-2.60%)=RM 3.51

Answer 2

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