Silverline Electricals Limited wasfounded ten years ago by Jim and Wendy Birt. The companymanufactures

and installs both traditional andcontemporary models of lights for residential and commercialpurposes.

Silverline Electricals Ltd hasexperienced rapid growth because of the new technology thatincreases the

energy efficiency of its systems andthe introduction of new models of LED integrated lights. Thecompany is

equally owned by Jim and Wendy holding 100,000 shares each.

In August 2018, Jim and Wendy have decided to value theirholdings in the company for financial planning
purposes. To accomplish this, they have gathered the followinginformation about their main competitors in
the industry

	EPS ($)	DPS ($)	Share Price ($)	ROE (%)	Required rate (%)
Colonial Lighting	0.42	0.08	7.65	10.5	9.5
Reliable Lighting Plus	0.46	0.26	6.25	11.5	10.5
FullBright Electricals	-0.24	0.27	24.3	12.5	11.5
Industry Average	0.36	0.27	8.24	11.0	10.5

Last year, Silverline ElectricalsLtd had an EPS of $0.52 and paid dividends to Jim and Wendy of$31,200 each.

The company also had a return onequity of 15%. Jim and Wendy believe a required rate of return of12% for

the company is appropriate.

Required:
1. Assuming the company continues its current growth rate (growthrate should be inferred from the
data given) into the infinite period, what is the share price ofthe company?
(7marks)
2. To verify their calculations, Jim and Wendy have hired RichardWang, a consultant. Richard was
previously an equity analyst, and he has a good understanding ofthe electrical Industry. Richard has
examined the company’s financial statements as well as those of itscompetitors. Although Silverline
Electricals Ltd currently has a technological advantage, Richard’sresearch indicates that Silverline
Electricals Ltd’s competitors are investigating other methods toimprove efficiency. Given this, Richard
believes that Silverline Electricals technological advantage willlast for only the next five years. After
that period, the company’s growth is likely to slow down to theindustry average. Additionally,
Richard believes that the company’s required return currently istoo high and so after year 5, the
industry average required return is a more appropriate rate forvaluation. Taking Richard’s
assumptions into consideration, calculate the estimated share priceof Silverline Electricals Ltd.

3. What is the industry average price-earnings ratio? What isSilverline Electricals Ltd’s price-earnings
ratio based on Richard’s estimation in part (2) above? Comment onany differences and explain why
these differences may exist?

4. After a discussion with Richard, Jim and Wendy agree that theywanted to increase the value of the
company’s equity. Like many small business owners, they want toretain control of the company and
do not want to sell shares to outside investors. They also feelthat the company’s debt is at a
manageable level and do not want to borrow more money. What stepscan they take to increase the
share price? - justify each of your suggestions.