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  3. question b4 (a) a2 caf expects earnings per share

Question B4 (a) A2 Caf expects earnings per share of $2.56 next year. Current book...

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Accounting

Question B4

(a) A2 Caf expects earnings per share of $2.56 next year. Current book value is $4.70 per share. The appropriate discount rate is 11 percent. Compute the share price for A2 Caf if earnings grow at 3 percent forever by using the Residual Income Model. (6 marks)

(b) Sisters Corp. expects to earn $6 per share next year. The companys ROE is 15% and its plowback ratio is 60%. If the companys required return is 10%, determine the present value of its growth opportunities. (8 marks)

(c) The contract size for platinum futures is 50 troy ounces. Suppose you need 300 troy ounces of platinum and the current futures price is $2,025 per ounce.

Required:

(i) Determine the number of futures contract used and how much you will pay for the platinum. (3 marks)

(ii) Compute the profit/loss (in $) if platinum will be sold for $2,075 a troy ounce when the futures contract expires. (3 marks)

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