Question

XYZ Public Company Limited expects that the company will have a constant growth (g) at 3% per annum. CEO would like to know the fundamental value of the company’s share. As a CFO, please prepare the share valuation based on the following methodologies and assumptions: (10 points) Assumptions for CAPM r = Rf + (Rm-Rf)*b - Average return of the stock market is 10% per annum ….(Rm) - 30 years Government Bond yield = 3.5% …..(Rf) - b (beta) of XYZ stock = 1.2 ……(b or beta)

Answer 1

To find the fundamental value of XYZ Public Company Limited’s shares using CAPM, we first calculate the required rate of return, which is 11.3% using the provided average stock market return, government bond yield, and beta. Then, the Gordon Growth Model is used to value the share, which requires the next expected dividend, the calculated required rate of return, and the growth rate. Without the dividend information, we cannot complete this calculation.

Step-by-step explanation:

To calculate the fundamental value of XYZ Public Company Limited's shares using the Capital Asset Pricing Model (CAPM), first, we need to determine the required rate of return using the formula:

r = Rf + (Rm-Rf)*b

Given the average return of the stock market (Rm) is 10%, the 30-year Government Bond yield (Rf) is 3.5%, and the beta (b) of XYZ stock is 1.2, the required rate of return (r) would be:

r = 3.5% + (10% - 3.5%) * 1.2 = 11.3%

Next, we use the Gordon Growth Model to find the share valuation, which assumes a constant growth rate (g) of 3% per annum:

Price per share = Dividend per share / (r - g)

You must take the next dividend expected to be paid and divide it by the required rate of return minus the growth rate. This will give you the intrinsic value of the company's share. However, without the dividend information, we cannot complete the calculation. Keep in mind when applying this model, its assumptions must be met, i.e., constant growth and all future dividends grow at a steady rate indefinitely.