Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

The table below gives the end-of-year levels of the price of an ordinary share in Kamili Ltd. and of a representative Stock Exchange Index.


Required:
Use the information to calculate the beta coefficient of Kamili Ltd.s ordinary shares, ignoring any dividend payments. (Work to four decimal places only at each stage of calculation). (12 marks)
c) Using the beta calculated in (b) above, and given a risk-free rate of 5% a year and an expected return from equities generally of 8% a year, calculate the expected rate of return on Kamili Ltd.‟s ordinary shares.
ANSWER
b) Calculation of Kamili Limited Beta Coefficient:
The beta coefficient of Kamili Limited βk is given by:

c) The expected rate of return of Kamili Limited shares can be calculated using the formula: Rw = Rf + βk (Rm – Rf)
Where: Rf = risk free rate
Rm = expected market return
βk = beta coefficient of Kamili Ltd.

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