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Company X and Company Y both pay an annual cash return to shareholders of 34.5 cents per share and this is expected to continue in perpetuity. The risk-free rate of return is 8% and the current average market rate of return is 12%. Company X’s ? coefficient is 1.8 and Company Y’s is 0.8.
What would be the predicted market value of each company’s shares?
a X = 220 cents; Y = 803cents
b X = 308 cents; Y = 227 cents
c X = 227 cents; Y = 308 cents
d X = 803 cents; Y = 220 centsPlease stop setting test questions that are not even askable in Paper P4.
(If these are questions that you have been given as homework, then we do not do your homework for you.)
Everything needed to be able to answer this question is explained in detail (with examples) in my free lectures for both F9 and P4. (This is revision of F9)
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