may hold in practice if the investors are well-diversified. In Section 1: Shareholder Analysis, it
has been found that the shareholders are well-diversified and therefore this assumption does
hold. However, this assumption may also be invalid since the not all shareholders have a
diversified portfolio.
The variables of the equation have been established as follow:
The risk-free rate chosen is the 10-year Australian government bond. This specific bond has been
chosen since it is considered to be the safest bond on the market. The current government rate as
quoted by Bloomberg is 2.56%.
19
CAPM relies on historical values than actual value, and
therefore the government bond given by Bloomberg is considered to be equal to the historical
bond rate for the given period for this report. The 10-year Australian government bond is
considered to be risk-free but in real world situation this is not the case.
20
17
ZviBodie et al.,
Principles of Investments
(McGraw-Hill Education (Australia) Pty Ltd, 2013), 72.
18
Ben McClure, “The Capital Asset Pricing Model: An Overview,”
Investopedia
, accessed March 20, 2016,
.
19
“Australian
Rates
&
Bonds,”
Bloomberg
Market
,
accessed
March
20,
2016,
.
20
Elson
Goh,
“Lecture
3:
Cost
of
Capital
and
Valuation,”
2016,
3925956_1.

12
The beta for the given time period has been calculated in Appendix E. The beta obtained through
regression analysis of the discrete weekly return for the stock against the discrete weekly return
for All Ordinaries index is 0.024. It is assumed that the beta will remain constant throughout the
period analysed.
The market’s return which was sourced in Section 2.2 is quoted as 6.23%.The return on equity
calculated using CAPM is therefore given by:
࠵?
L
= ࠵?
M
+ ࠵?(࠵?
J
− ࠵?
M
)
= 0.0256 + 0.024 (0.0623-0.0256)
=2.65%
3.1.2
Dividend Growth Model
The dividend growth model (DGM) assumes that the dividends grow perpetually at a constant
rate. The price of the stock is equal to the ratio of the next year dividend to the difference
between the rate of return of equity and the constant growth rate.
21
The equation below gives a
better understanding of the model:
࠵?
P
=
࠵?
Q
࠵?
R
− ࠵?
The DGM is only applicable if some assumptions hold true. One assumption is that the company
should pay dividend at a constant growth rate. Royal Wolf Holdings has been paying semi-
annual earnings per share. The return on equity using the Dividend Growth Model would be
given by:
࠵?
R
=
࠵?
Q
࠵?
P
+ ࠵?
The variables in this equation has been obtained as follow:
21
“Dividend
Growth
Model,”
Nasqad
,
accessed
March
20,
2016,
.

13
The share price at the beginning of the period, i.e. 1 July 2014 is $3.5.