FUNDAMENTALS OF FINANCE
Assignment Question 2 (Stock Valuation)
(Submit at your tutorial class in week 7; Note: Late submission – Zero Mark) Question 1 (65 marks)
ASAM Ltd. has just developed a new solar panel device that will generate 200 percent more than any solar panel currently on the market. As a result, ASAM is expected to experience a 16% annual growth rate for the next 5 years. By the end of 5 years, ASAM’s growth rate will slow down to 6% per year indefinitely. Shareholders require a return of 12 percent on ASAM’s stock. The most recent annual dividend (D0), which was paid yesterday, was $2.00 per share.
(a) Calculate ASAM’s expected dividends for 2015, 2016, 2017, 2018 and 2019. (b) Calculate the stock price today (P0).
(c) Calculate the expected dividend yield, capital gain yield in 2015.
(d) Calculate the expected dividend yield, capital gain yield in 2020.
(e) Assume that ASAM’s annual growth will be only 13% during the next 5 years and that the ASAM’s normal growth rate will be only 5% after 5 years. Without doing calculations, what general effect would these growth-rate changes have on the price of ASAM’s stock.
Question 2 (35 marks)
PP Ltd. expects to have earnings this year of $4 per share. It plans to retain all of its earnings for the next two years. It will retain 50% of its earnings in year 3 and year 4. It will retain 20% of earnings from year 5. Each year, retained earnings will be invested in new projects with an expected return of 25% per year. Any earnings that are not retained will be paid out as dividends. Assume that all earnings growth comes from the investment of retained earnings. Cost of capital is 12%. Calculate the price of PP today.