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The current share price of Blueberry plc is 205p. It reported earnings per share of 14p and the financial history of the firm is as follows: Dividends Burberry's Return Market ReturnLast reported 14p 11% 10%One year ago 13p 8% 7%Two years ago 12p 5% 3%Three years ago 11p 15% 3%Four years ago 10p 21% 9%Five years ago 9p 3% 3% The rate of growth in earnings and dividends shown in the past is expected to continue into the future. The risk-free rate of return is 6.5 per cent and the risk premium on the average share has been 5 per cent for decades.
Problem a) Calculate the historical price-earnings ratio.
Problem b) Calculate the future growth rate of dividends.
Problem c) Using the Burberry's return calculate the β of the shares.
Problem d) Calculate the expected return on a share of this risk class.
Problem e) Calculate whether the shares at 205p are over- or under-prices.
Problem f) Explain what are the main problems with CAPM.
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