2 Cost of capital 20.
00%
Year 1 2 3 4 5
Profit after tax ($’m) 320 339 360 381 404
Growth rate = (404/320)^(1/4)-1 = 6.00%
Market value = (404*1.06) / (0.10 – 0.06) = 10,706.00 million
3 Using DGM, Cost of equity capital (Ke) = D0 * (1 + g) / P0 + g (made Ke the subject of the formula)
= 0.36 × (1 + 0.04) / 5.20 + 0.04 = 0.112 = 11.2%
11.20%
he subject of the formula)
Required return 8.00%
Year CF ($) DF @ 6% PV ($)
1 Interest 7 0.926 6.48
2 Interest 7 0.857 6.00
3 Interest 7 0.794 5.56
3 Redemption val 100 0.794 79.40
97.44
Each $100 bond will have a market value of $97.44
Required return 3.00% per quarter (since its 12% annually)
n= 10 quarters
Periods CF ($) DF @ 1% PV ($)
1-10 Interest 2 8.530 17.06 find annuity factor from table, I used formula
10 Redemption 120 0.744 89.29
106.35
You need to use the cost of debt as the discount rate, and remember to use an annuity factor for the
interest. We are discounting over 10 periods (quarters) using the quarterly discount rate (12%/4).
Market value is $106.34.
Conversion value = P0 (1 + g) n × R = 3.20 × 1.03^6 × 34 = $129.91 129.91
Periods CF ($) DF @ 11% PV ($)
1-6 Interest 9 4.231 38.07
6 Conversion value 129.91 0.535 69.46
107.53
Corporation tax is not relevant as investors pay market price and they receive the gross dividend.
Investors would opt to convert, hence the redemption value built into market price will be $107.58
Answer:
a. Growth = Ö (0.72/0.5) – 1 = 0.20 or 20% 0.2
Using DGM, P0 = (D0 (1 + g)) / (Ke - g)
= (0.72 × 1.2) / (0.25 - 0.2) = $17.28
Market Capitalization = No. of shares in issue × value per share
= 2,000,000 × 17.28 = $34,560,000
b. Using DGM, P0 = (D0 (1 + g)) / (Ke - g)
= (0.72 × 1.15) / (0.25 - 0.15) = $8.28
Market Capitalization = No. of shares in issue x value per share
= 2,000,000 × 8.28 = $16,560,000
c.
Year 2017 2018 2019 From 2020
$ $ $ $
Dividend 1,670,400 1,937,664 2,247,690 2,517,413
Annuity to infinity 1/(Ke-g) 12.5
Present value at 2020 31,467,663
Discount Factor 0.833 0.694 0.579 0.579
PV 1,391,443 1,344,739 1,301,413 18,219,777
Total Value $22,257,372
0.2
17.28
34560
a. Net assets = 625 – 60 – 50 – 120 = $395 million
b. Dividends are expected to grow at 2% per year and the cost of equity is 9%.
P0 = (27 ×1.02) / (0.09 - 0.02) = $393 million
c. The profit after tax figure of $39 million and the earnings yield that can be used for the valuation is 10%.
ie 39 / 0.10 = $390 million.
$m
Profit after tax (earnings) 39
Dividends 27
Non-current assets 500
Current assets 125
Current liabilities 60
Ordinary shares ($1 nominal) 80
Reserves 315
Non-current liabilities
6% Bank loan 50
8% Bonds ($100 nominal) 120
395
393.43
uation is 10%.
390.0