Calculate the historical price-earnings ratio

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Reference no: EM132933422

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 Return
Last 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.

Reference no: EM132933422

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