The risk free rate of return Rf is 9 percent. The expected rate of return on the market portfolio Rm is 13 percent. The expected rate of growth for…
CA Final · Advanced Financial Management · MTP · May 2025
The risk free rate of return Rf is 9 percent. The expected rate of return on the market portfolio Rm is 13 percent. The expected rate of growth for the dividend of Platinum Ltd. is 7 percent. The last dividend paid on the equity stock of firm A was - 2.00. The beta of Platinum Ltd. equity stock is 1.2. (i) What is the equilibrium price of the equity stock of Platinum Ltd.? (ii) How would the equilibrium price change when changes (in absolute terms) in various parameters takes place as follows: The inflation premium increases by 2 percent andthe expected growth rate increases by 3 percent andthe equity beta of Platinum Ltd. rises to 1.3.
Suggested Answer and Working Notes:
(i) Equilibrium price of Equity using CAPM = 9% + 1.20(13% - 9%) = 9% + 4.80%= 13.80% P = D1 / (ke - g) = 2.00(1.07) / (0.138 - 0.07) = 2.14 / 0.068 = 31.47 (ii) New Equilibrium price of Equity using CAPM = 11% + 1.3(15% - 11%) = 11% + 5.2%= 16.20% P = D1 / (ke - g) = 2.00(1.10) / (0.162 - 0.10) = 35.48
Topics: Security Valuation
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