Beta coefficient of X Ltd is 1

Finance Jan 08, 2021

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?

Expert Solution

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 =D_o (1+g )/K_e-g

We get the equilibrium price

P = (4 × 1.08)/ (0.17 – 0.08)

= 48

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