A company's current EPS is Kshs 12. The firm pays out 40% of its earnings as dividend and has a growth rate of 6 % p.a. which is expected to continue into perpetuity. The company has a beta value of 1.4 and the risk free rate is 10%. The expected market return is 15%.
Required:
(i) Using Capital Asset Pricing Model (CAPM), compute the expected return on the company's equity. (3 marks)
(ii) What implications does CAPM bring if it is used to determine a firm's cost of equity?
(2 marks)

Answer rating: 100% (QA)

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