Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

The following data have been developed for the Ujasiri Company Limited:

The yield to maturity on Treasury Bills is 0.066 and is expected to remain at this point for the foreseeable future.

Required:

(a) The equation of the Security Market Line.
(b) The required return for the Ujasiri Company Limited.
(c) Is the Company correctly priced, underpriced or overpriced in the market? Explain.

ANSWER


The equation of the SML: Rj = 6.6% + 5.4% * Bj

(b) The required return for Ujasiri: Ru = 6.6% + 5.4% * 1.27 = 12.92%

(c) The Company is overpriced in the market.

Reason: expected return is less than required return implying that compensation for its level of risk is inadequate.

(Visited 36 times, 1 visits today)
Share this on:

Leave a Reply

Your email address will not be published. Required fields are marked *