QUESTION

a. The risk free rate is 10 percent and the expected return on the market portfolio is 14 percent. A firm considers a project that is expected to have a beta of 1.3, whereas the equity beta of the company securities is 1.2.

Answer the following questions and provide supporting explanations

1) What is the required rate of return on the project?

2) If the expected internal rate of return of the project is 15 percent, should it be accepted?

3) Explain how CAPM provides a framework for measuring the systematic risk of an individual security in a well diversified portfolio, using the concept of security market line

b. The common stock holder receives two types of return from their investment. Explain them

c. Durell Ltd is foreseeing a growth rate of 15 per cent per annum in the next three years. It is likely to fall to 12 per cent in the fourth year. After that, the growth rate is expected to stabilize at 7 per cent per annum. If the last dividend paid was Rs.10 per share and the investors required rate of return is 20 per cent, calculate the maximum price at which you will be prepared to buy the company's shares

d. Explain why preferred stock is more similar to debt than equity?