Mr. X is holding 2,000 shares of PQR Ltd. Presently, dividend being paid by the company is 2.50 per share and the share is being sold at 45 per…

On the basis of existing and revised factors, rate of return and price of share is to be calculated. Existing rate of return = Rf + Beta (Rm - Rf) = 10% + 1.3 (6%) = 17.80% Revised rate of return = 8% + 1.2 (4%) = 12.80% Price of share (original) Po = D (1 + g) / (Ke - g) = 2.50 (1.04) / (0.178 - 0.04) = 2.60 / 0.138 = 18.84 Price of share (Revised) Po = 2.50 (1.06) / (0.128 - 0.06) = 2.65 / 0.068 = 38.97 Advise: 1. Market price of share of 45is higher in comparison to current equilibrium price of 18.84 and revised equity price of 38.97. 2. Under this situation investor should sell the share. Alternatively, if Dividend is considered as expected dividend then the solution will be as follows: On the basis of existing and revised factors, rate of return and price of share is to be calculated. Existing rate of return = Rf + Beta (Rm - Rf) = 10% + 1.3 (6%) = 17.80% Revised rate of return = 8% + 1.2 (4%) = 12.80% Price of share (original) Po = D / (Ke - g) = 2.50 / (0.178 - 0.04) = 2.50 / 0.138 = 18.12 Price of share (Revised) Po = 2.50 / (0.128 - 0.06) = 2.50 / 0.068 = 36.76 Advise: 1. Market price of share of 45is higher in comparison to current equilibrium price of 18.12 and revised equity price of 36.76. 2. Under this situation investor should sell the share.