Question 3: Equity Valuation (22 marks — 30 minutes) (Please note that this question has two parts) 0.3.1) 0.3.2) A friend of yours is interested to invest in a listed South African company in the Clothing Retail industry. He is specifically considering making an investment in Woolworths or Foschini and he has asked you, as an MBA student, to assist him in making his investment decision. Consider the following market and company ?nancial information and answer the question that follows: Current share Latest price reported (rand) EPS (rand) 45.50 3.50 140.00 12.00 Foschini 3.1 3) Use the data in the table above and calculate the price/earnings ratio for both companies (4 marks) 3.1 b) You may notice from your calculations above, the relative price of Woolworths differs from that for Foschini. Given that both are large fashion retailers listed on the JSE, what could possible reasons be for the difference in prices that investors are willing to pay? (NOTE: List at least four possible explanations) (4 marks) Suppose a company that you want to invest in has just announced that it intends to pay a dividend of R2 in one month's time. It intends to increase its dividend payments by R0.50 for the following two years. After this it is expected that its dividend payments will grow by 5% per year forever. 3.2 a) If your required rate of return is 10% for this investment, how much will you be willing to pay for this share? (12 marks) 3.2 b) In (13.2 a) above you have just used expected dividends to value the price of a share in a company. But, on the JSE a large proportion of companies do not pay any dividends. However, investors are still willing to invest in these stocks. Explain the reasons for this. {2 marks!

pur-new-sol

Related Questions