Part a.

Example

Deakin Ltd has just recently published following financial information:

Expected earnings per share $20

Deakin's market beta 0.8

Earnings per share to be retained by the firm 30%

Growth rate in earnings per share7% p.a.

Required:

1. Calculate Deakin's P/E ratio if the expected return on the ASX300 is 12% p.a. and the return on 10 year Commonwealth Government Bonds is 4% p.a. What does this ratio tell you?

2. Calculate Deakin's share price using P/E ratio calculated in Part (7+2=9 marks)