School of Management Studies Finance I (BUS2019S): 2nd Semester 2007

SUGGESTED SOLUTIONS TO TUTORIAL 4: SHARE VALUATION

Chapter 8

CHAPTER 8: [1, 12, 21] …and for practice….2, 17, 22

1. P0 = D0 (1 + g) / (r – g) = R3,00 (1,05) / (0,12 - 0,05) = R45,00

P3 = D3(1+g)/(r – g) = D0(1+g)4/(r – g) = R3,00(1,05)4/(0,12 – 0,05) = R52,09
P15 = D15(1+g)/(r – g) = D0(1+g)16/(r – g) = R3,00(1,05)16/(0,12 – 0,05) = R93,55

12. P4 = D4(1+g)/(r – g) = R1,00(1,09)/(0,17 – 0,09) = R13,63

P0 = R4,75/(1,17) + R3,00/(1,17)2 + R2,00/(1,17)3 + R(1+13,63)/(1,17)4 = R15,31

21. P0 = R4,25(1,15)/(1,1375) + R4,25(1,15)(1,1)/(1,1375)2

+ R4,25(1,15)(1,1)(1,05)/(0,1375 – 0,05)(1,1375)2 = R58,31

2. r = D1/P0 + g = R4,00/R45,00 + 0,06 = 14,89%

17. P3 = R12,00 / 0,13 = R92,31 ; P0 = R92,31 / 1,133 = R63,98

22. P0 = R4,25(1,15)/(1 + r ) + R4,25(1,15)(1,1)/(1 + r )2

+ R4,25(1,15)(1,1)(1,05)/( r – 0,05)(1 + r )2 = R100 ;
Using trial and error, or a calculator with a root solving function, gives r = 10,109%

MINI CASE STUDY: THE WATERFRONT WOOD COMPANY LTD

(a) Value of a share today

YEAR END 0 [NOW] 1 2 3 4
Growth rate 30% 30% 30% 7% in perpetuity
Expected Dividend (cents) 150 195 254 330 353
Value (based on pertpetual growth)
(b) P3 = D4 / (k - g) = 353/ (23% - 7%) 2,204 (V = D1/(Rs - g)
(c) Cash Flows (cents) 195 254 2,533
PV factor at 23% 0.8130 0.6610 0.5374
Discounted (PV) cash flows (cents) 159 168 1,361
Present Value [Sum of discounted cash flows] 1687.56
Value of a share today R 16.88

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