a) Mega is a limited company whose only asset is a fully diversified stock portfolio with a beta of 1. CAPM applies with risk-free borrowing and lending available to all investors at 5%. The market risk premium is 15%. The current market value of Mega is Sh 80.Investors expect Mega to be worth Sh 90 in one year, right after dividends have been paid to shareholders.

REQUIRED

If the CAPM applies, what dividend yield is expected from Mega? (10 marks)

b) A broker from Mombo Stocks has contacted you with an investment opportunity: share ownership in a company which will pay a dividend of Sh12.00 per share for the foreseeable future, i.e. in perpetuity. A friend, who is an independent financial advisor, has advised that the stock in question has an estimated Beta of 3.85. She has also provided you with the expected return of the market portfolio (12%) and the current risk-free rate (3%). Mombo's broker is offering the stock at a price of $45.00 per share.

REQUIRED:

Is this a reasonable price for the stock? Would you consider this to be a good investment for an investor seeking a low-risk investment? Why or why not?