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What is the estimated price per share for each bank

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Reference no: EM132776895

Bank I and bank II have the following information:Bank I:Current annual dividend is $1 per share
Beta of bank I's share is 2

Current share price is $20

Bank II

Beta of bank II's share is 1.5

Current annual dividend is $0.6 per share

Current share price is $10

Required

Problem 1. Interpret the beta values. Which share would a risk-averse investor invest his/her money in? Explain why?

Problem 2. Given a risk-free rate of 4% and a market portfolio return of 10%, what is the expected return of each bank's share?

Problem 3. Estimate the price per share for each bank using the zero dividend growth model (the discounting rate is the expected return obtained from 2). Based on the estimated share price, what recommendation would you make to the share investor (i.e., BUY, HOLD, SELL)? Explain why.

Problem 4. Assume a constant annual growth rate of 5% to perpetuity for dividends, what is the estimated price per share for each bank? Based on the estimated share price, what recommendation would you make to the share investor? Explain why.

Problem 5. Assume that the mean of P/E (i.e., share price/earning per share) in the banking sector is 15 and that EPS (i.e., earning per share) next year is $1.3 for bank I and $0.7 for bank II, what is the estimated price per share for each bank using the earnings capitalisation model? Based on the estimated share price, what recommendation would you make to the share investor? Explain why.

Reference no: EM132776895

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