Question

Question 8 (15 marks) You purchased a share in VirtualConferences Inc. a year ago. In the last year, the price of the share has increased to $26.25, which is an increase of $1.75. In addition, you have received a $0.50 dividend. The beta of the share is 1.3. Market conditions are looking favourable and the expected return on the market is 12.5%, and the risk-free rate is 4%. What is the holding period return on this asset? (4 marks) a. b. Calculate the expected return for the share using CAPM. (2 marks) Draw the Security Market Line, explain what beta represents and why it is an important concept in finance. (9 marks) c. Question 9 (15 marks) Discuss the following: What is Sustainable Finance? (4 marks) a. b. How is Corporate Sustainability usually measured? List three factors and give an example of each (6 marks) How reliable do you think reporting by companies is on Corporate Sustainability? What could improve this reliability? (5 marks) c.

Answer 1

Answer to Q#8 (First question in the list) Holding period return (Change in bond price+Dividend income) / Initial bond price Change in bond price $1.75 $0.50 Add: Dividend income Total returns earned$2.25 24.50 [$26.25- $1.75] Irniiial liel pricx: [$2.25/S24.501 Holding period return 9.18% Using CAPM, Expected return p Rate [Beta x (Market Return- Risk-free rate)] ed return per shares 4.0% + [1.3 x ( 12.5%-4.0%) per share (Common) - Risk-free Expected return per share-4.0% + (1.3 x 8.5%) Expected return per share-4.0% +11.05% Expected return per share 15.05%

Requirement-(c: Risk-free Market Expected Beta Observation: Scenario return % Rate return 4.0% 9.95% {4.0% + [0.7 x (12.5%-4.0%)) There exists a direct relationship between beta 12.5% 0.7 4.0% 12.5% 0.9 11.65% {4.0% + [0.9 x (12.5%-4.0%)) value and expected return. Beta of less than 1.0 2 4.0% 12.5% 13.35% {4.0% + [1.1 x (12.5%-4.0%)) {4.0% + [1.3 x (12.5%-4.0%)) indicates lower risk: beta of 1.0 indicates risk is 1.1 4.0% 12.5% 1.3 15.05% nuetral; beta of more than 1.0 indicates higher 4 4.0% 12.5% 1.5 16.75% {4.0% + [1.5 x (12.5%-4.0%)) risk. Higher the risk, higher the expected return 4.0% 12.5% 1.7 18.45% {4.0% + [1.7 x (12.5%-4.0%)) and lower the risk, lower the expected return. Security Market Line (SML) Graph 18.45% 20.00% 16.75% 15.05% E 15.00% 3.35% 11.65% 9.95% 10.00% 5.00% 0.00% 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.11.21.3 1.4 1.5 1.6 1.7 1.8 Beta