A major new client has requested your company to present aninvestment seminar to the municipal mayors of the representedMetros. As an investment specialist, you have been tasked to assistyour company in preparing the presentation. To illustrate thecommon share valuation process, you have been asked to analyzeBusiness Analytics, an employment agency that supplies wordprocessor operators and computer programmers to businesses withtemporarily heavy workloads. You are to answer the following:
2.1 Assume that Business Analytics has a beta coefficient of1.2, that the risk-free rate ( the yield on T-bonds) is 3%, andthat the required rate of return on the market is 8%. What isBusiness Analytic's required rate of return?
2.2 Assume that Business Analytics is a constant growth companywhose last dividend (D0, which was paid yesterday) was R2.00 andwhose dividend is expected to grow indefinitely at a 4% rate.
i. What is the company's expected dividend stream over the next3 years?
ii. What is its current share price?
iii. What is the share's expected value 1 year from now?
2.3 now assume that the share is currently selling at R40.00.What is its expected rate of return?
2.4 What would the share price be if its dividends were expectedto have zero growth?
2.5 Now assume that Business Analytics'dividend is expected togrow at 30% in the first year, 20% in the second year, 10% in thethird year, and return to its long-run constant growth rate of 4%.What is the share's value under these conditions?
2.6 Suppose Business Analytics' is expected to experience zerogrowth during the first 3 years and then resume its steady-stategrowth of 4% in the fourth year. What would be its value then?
2.7 Finally, assume that Business Analytics' earnings anddividends are expected to decline at a constant rate of 4% peryear, that is, g=-4%. Why would anyone be willing to buy such ashare, and at what price should it sell?
2.8 suppose Business Analytics' embarked on an aggressiveexpansion that requires additional capital. Management decided tofinance the expansion by borrowing R40 million and by haltingdividend payments to increase retained earnings. Its WACC is now 7%and the projected free cash flows for the next three years are -R5million, R10 million, and R20 million respectively. After Year 3,free cash flow is projected to grow at a constant 5%. What isBusiness Analytics' market value of operations? If it has 10million shares, R40 million of debt and preferred share combined,and R5 million of non-operating assets, what is the price pershare?
2.9 Suppose Business Analytics decided to issue preferred sharethat would pay an annual dividend of R5.00 and that the issue pricewas R100.00 per share. What would be the share's expected return?Would the expected rate f return be the same if the preferred sharewas a perpetual issue or if it had a 20-year maturity?
