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Homework answers / question archive / Beta coefficient of X Ltd is 1
Beta coefficient of X Ltd is 1.4. The company has been maintaining 8% growth rate in dividend and earning. The last dividend paid was Rs 4. Return on GOI securities is 10% while the market return is 15%. The current market price of one share is Rs 36. What is the equilibrium price of this share?
The expected return on
As per CAPM is given by:
R = Rf + β(Rm – Rf)
Given Rm = 15%, βTarget = 1.4, Rf = 10%
Therefore, R = 0.1 + 1.4 × 0.05 = 17%
Substituting, this for Ke = in the dividend discount model formula
P =Do (1+g )/Ke-g
We get the equilibrium price
P = (4 × 1.08)/ (0.17 – 0.08)
= 48
