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Sunny Investments, an equity firm, requested your help in deciding whether to invest in the shoe manufacturing sector. Sunny is interested in two companies which are both listed on the Johannesburg Stock Exchange. The following information is known about the two companies. Sandy Shoes Ltd is launching a new shoe. It is estimated that there will be a 85% probability of a successful launch of the product, in which case the share price will be R21.00 in a years time and a dividend of 320c per share will be paid. It is also estimated that there is a 10% probability of a partly successful launch, in which case the share price will be R15.85 in a years time and a dividend of 260c will be paid. Lastly, it is estimated that there is a 5% probability of an unsuccessful launch, in which case the share price will be R11.17 in a years time and a dividend of 115c will be paid. The share currently trades at R 13.80 per share. Lera Shoe Manufacturers has shown in the past that its returns are much more volatile than the markets. This volatility is evident from a b of 1.3. The returns that can be achieved in this market are currently estimated at 19% and at a risk premium of 9% over risk-free investments.

Using Capital Asset Pricing Model (CAPM), calculate the required return for Lera Shoe Manufacturers. (4 Marks)

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