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Dear sir, 2 things.
kindly explain this question
1. a company has 4 million shares in issue with a nominal value of .50c per shae. a dividend of 24c per share has just been paid. four years ao the dividend ws 20.51 per share
The beta of shres in the company is .5. rf rate is 3% and market premium is 8%
what is the market capitalisation of the company?2. i need you to explain how to use the different rates the way they are quoted with ACCA. for instance
$/pounds 1.4851-1.5001
i get confused when i am to convert . not sure which of the two to use.
Thanks in advance
Question 1:
You use the CAPM formula to calculate Ke (which here is 3% + 0.5×8% = 7%.
The growth rate – (fourth root of 24/20.51) – 1
Then use the growth model formula to calculate the market value.
Question 2:
For the rate given in your question:
If the company is buying the first currency ($’s) then you use the lower rate (1.4851)
If the company is selling the first currency ($’s) then you use the higher rate (1.5001)(It is always the rate that is worse for the company – it is the bank who makes the profit!)
You really should watch the lecture on foreign exchange risk – I spend time first explaining how to decide which rate to use.
Thank you so much.
I actually worked out the first one after i sent the question.
The second one. thanks for explaining, and i will surely listen to the lecture.
Regards,
Hi, Sir, I’m a little bit confused about this formula,
E(r i )=R f + ? i (E(r m ) – R f )For this part: (E(r m ) – R f )
May I know when should we minus the risk free rate and when we shouldn’t, as for the 1st question in this thread, I did minus the risk free rate and got a different answer.Sorry, sir, I think I found the key word, market “premium” & market “return”. Thank you, sir:)
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