Combined Effect (Example) Homework Help

EXAMPLE

To illustrate the combined effect of the changes in the expected return and the required return in compute the value of the shares.

Solution

1

The net effect of the management decision which increased return (i.e. g from 7 to 9 per cent) as well as risk (i.e. K, from 16 to 17 per cent) is positive resulting in increase value of share. from Rs 33.3 10 Rs 37.5. As it increases the owners value, the decision seems to be in the interest of the shareholders.

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