Company AAA and company BBB operate in the smartphone sector, and have the following information: Company AAA: Beta of company AAA's share is 0.5 Current annual dividend is $1.2 per share Current share price is $15 Company BBB Beta of company BBB's share is 2 Current annual dividend is $1.7 per share Current share price is $20 Required A. Interpret the beta values. Which share would a risk-averse investor invest his/her money in? Explain why? B. Given a risk free rate of 4% and a market portfolio return of 8%, what is the expected return of each company's share? C. Estimate the price per share for each company using the zero dividend growth model. Based on the estimated share price, what recommendation would you make to the share investor (i.e., BUY, HOLD, SELL)? Explain why. D. Assume that the mean of P/E (i.c., share price/carning per share) in the smartphone sector is 10 and that EPS (i.e., earning per share) next year is $1.3 for company AAA and $2 for company BBB, what is the estimated price per share for each company using the earnings capitalisation model? Based on the estimated share price, what recommendation would you make to the share investor? Explain why.
Company AAA and company BBB operate in the smartphone sector, and have the following information: Company AAA: Beta of company AAA's share is 0.5 Current annual dividend is $1.2 per share Current share price is $15 Company BBB Beta of company BBB's share is 2 Current annual dividend is $1.7 per share Current share price is $20 Required A. Interpret the beta values. Which share would a risk-averse investor invest his/her money in? Explain why? B. Given a risk free rate of 4% and a market portfolio return of 8%, what is the expected return of each company's share? C. Estimate the price per share for each company using the zero dividend growth model. Based on the estimated share price, what recommendation would you make to the share investor (i.e., BUY, HOLD, SELL)? Explain why. D. Assume that the mean of P/E (i.c., share price/carning per share) in the smartphone sector is 10 and that EPS (i.e., earning per share) next year is $1.3 for company AAA and $2 for company BBB, what is the estimated price per share for each company using the earnings capitalisation model? Based on the estimated share price, what recommendation would you make to the share investor? Explain why.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 3
Company AAA and company BBB operate in the smartphone sector, and have the
following information:
Company AAA:
Beta of company AAA's share is 0.5
Current annual dividend is $1.2 per share
Current share price is $15
Company BBB
Beta of company BBB's share is 2
Current annual dividend is $1.7 per share
Current share price is $20
Required
A. Interpret the beta values. Which share would a risk-averse investor invest
his/her money in? Explain why?
B. Given a risk free rate of 4% and a market portfolio return of 8%, what is the
expected return of each company's share?
C. Estimate the price per share for each company using the zero dividend growth
model. Based on the estimated share price, what recommendation would you
make to the share investor (i.e., BUY, HOLD, SELL)? Explain why.
D. Assume that the mean of P/E (i.c., share price/earning per share) in the
smartphone sector is 10 and that EPS (i.e., earning per share) next year is $1.3
for company AAA and $2 for company BBB, what is the estimated price per
share for each company using the earnings capitalisation model? Based on the
estimated share price, what recommendation would you make to the share
investor? Explain why.
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