answer all questions and multiple choice

Oepr &Residual Income Valuation Maation Questions 18-25 relate to I Mangoba Nkomo, CFA, a senior equity analys with Roberson-Burler Invetments, South A has been assigned a recent graduate,, Manga Mahlanga, to assist in vahuations. Mabl pa a ineerested in pursuing a career in equity analysis. In their fir meeting, Nkomo and 509 Mangoba Nkomo and Manga Mahlangs gative ties in ampre- s value Mablangu discus the concept of residual income and its commercial applications. Nkomo determine the market value added for a hypothetical South African firm ads Mahlangu g the data provided in Exhibit 1. to apstart and its crowth xpect ares? s.Fa hould rough equity nodel. del to EXHIBIT 1 Hypothetical Firm Data (amounts in South African Rand) Aok value per share Sel thares ourstanding Cre share peice 825.43 820.00 30 milln Cor of equity Maker valae of debr Auncing book value of total capital Jnisic share value of equiry derived from residual income model Nkomo also shares his valuation report of the hypothetical firm with Mahlangu. Nkomos 13% R55 million R650 million R22.00 with port concludes that the intrinsic value of the hypothetical firm, based on the residual income madel, is R22.00 per share. To assess Mahlangu's knowledge of residual income valuation, Nomo asls Mahlangu two questions about the hypothetical firm: Question 1 What conclusion can we make about future residual earnings, given the made current book value per share and my estimate of intrinsic value per share Question 2 SuPpose you estimated the intrinsic value of a firm's shares using a constant erowth residual income model, and you found that your estimate of Intrin sic value equaled the book value per share. What would that finding imply about that firm's return on equity? ars. s the ium Satisfied with Mahlangu's response, Nkomo requests that Mahlangu use the single-stage midual income (RI) model to determine the intrinsic value of the equity of Jackson Breweries, a bewery and bottling company, using data provided in Exhibit 2. and Jackson Breweries Data (amounts in South African Rand) 9.5% EXHIBIT 2 ghr Constant long-term growth rate Constant long-term ROE Current market price per share 13% RI50.70 ow R55.81 of 11 % share Book value per Nkomo also wants to update an earlier valuation of Amersheen, a food retailer. The val- wion report, which was completed at the end of 2010, concluded an intrinsic value per re of R11.00 for Amersheen. The share price at that time was R8.25. Nkomo points out wMahlangu that, in late 2010, Amersheen announced a significant restructuring charge, es- ed at R2 million, that would be reported as part of operating carnings in Amersheen's Cost of equity aer- for nt 510 Equity Asset Valuation 2010 annual income statement. Nkomo asks Mahlangu the following question about dhe n strucruring charge: Bar 21 Jac A. Question 3 What was the correct way to treat the estimated R2 milion restracturing B. charge in my 2010 valuation report? Satisfied with Mahlangu's response, Nkomo mentions to Mahlangu that Amersheen te cently (near the end of 2011) completed the acquisition of a chain of convenience soe Nkomo requests that Mahlangu complete, as of the beginning of 2012, an updated valuaion of Amersheen under two scenarios 12 If the A B. Scenario 1 Estimate the value of Amersheen shares using a multistage residual in (RI) model with the data provided in Exhibit 3. Under Scenario 1, expected ROE in 2015 is 26 % but it is assumed that the firm's ROE will dowy de cline towards the cost of equity thereafter. 23. TH A . Scenario 2 Estimate the value of Amersheen shares using a multistage tesidual incm (RI) model with the data provided in Exhibit 3 but assume that, at the d of 2014, share price is expected to equal book value per share. 24. U A B EXHIBIT 3 Amersheen Data (amounts in South African Rand) 25. L Long-term growth rate starting in 2015 9.0% Expected ROE in 2015 26 % Current market price per share Book value per share, beginning of 2012 Cost of equity R16.55 R7.60 10% Persistence factor 0.70 2012 2013 2014 Expected earnings per share Expected dividend per share R3.28 R3.15 R2.90 R2.46 R2.36 R2.06 18. Based upon the information in Exhibit 1, the market value added of the hypothetical firm is closest to: A. R65 million. B. R113 million. C. R168 million. 19. The most appropriate response to Nkomo's Question 1 would be that the present value of future residual earnings is expected to be: A. zero. B. positive. C. negative. 20. The most appropriate response to Nkomo's Question 2 would be that the firm's return on equity (ROE) is A. equal to the firm's cost of equity. B. lower than the firm's cost of equity. C. higher than the firm's cost of equity Residual Income Valuation Chiepter the information in Exhibit 2, the intrinsic value per share of the equity of 21. Based upon Jackson Breweries is closest to: A. R97.67. B. R130.22, C. R186.03, 511 22. If Nkomo's 2010 year-end estimate of Amersheen shares intrinsic value was accurate, then Amersheen's shares were most likely. A overvalued. B. undervalued, C. fairly valued. 23. The most appropriate treatment of the estimated restructuring charge, In response to Nkomo's Question 3, would be: A an upward adjustment to book valuc R. an upward adjustment to the cost of equity. exclude it from the estimate of net income 24. Under Scenario 1, the intrinsic value per share of the equity of Amersheen is clesest to: A. R13.29. B. R15.57 C.R16.31. 25. Under Scenario 2, the intrinsic value per share of the equity of Amersheen is closest to: A. R13.29. B. R15.57. C.R16.31. Oepr &Residual Income Valuation Maation Questions 18-25 relate to I Mangoba Nkomo, CFA, a senior equity analys with Roberson-Burler Invetments, South A has been assigned a recent graduate,, Manga Mahlanga, to assist in vahuations. Mabl pa a ineerested in pursuing a career in equity analysis. In their fir meeting, Nkomo and 509 Mangoba Nkomo and Manga Mahlangs gative ties in ampre- s value Mablangu discus the concept of residual income and its commercial applications. Nkomo determine the market value added for a hypothetical South African firm ads Mahlangu g the data provided in Exhibit 1. to apstart and its crowth xpect ares? s.Fa hould rough equity nodel. del to EXHIBIT 1 Hypothetical Firm Data (amounts in South African Rand) Aok value per share Sel thares ourstanding Cre share peice 825.43 820.00 30 milln Cor of equity Maker valae of debr Auncing book value of total capital Jnisic share value of equiry derived from residual income model Nkomo also shares his valuation report of the hypothetical firm with Mahlangu. Nkomos 13% R55 million R650 million R22.00 with port concludes that the intrinsic value of the hypothetical firm, based on the residual income madel, is R22.00 per share. To assess Mahlangu's knowledge of residual income valuation, Nomo asls Mahlangu two questions about the hypothetical firm: Question 1 What conclusion can we make about future residual earnings, given the made current book value per share and my estimate of intrinsic value per share Question 2 SuPpose you estimated the intrinsic value of a firm's shares using a constant erowth residual income model, and you found that your estimate of Intrin sic value equaled the book value per share. What would that finding imply about that firm's return on equity? ars. s the ium Satisfied with Mahlangu's response, Nkomo requests that Mahlangu use the single-stage midual income (RI) model to determine the intrinsic value of the equity of Jackson Breweries, a bewery and bottling company, using data provided in Exhibit 2. and Jackson Breweries Data (amounts in South African Rand) 9.5% EXHIBIT 2 ghr Constant long-term growth rate Constant long-term ROE Current market price per share 13% RI50.70 ow R55.81 of 11 % share Book value per Nkomo also wants to update an earlier valuation of Amersheen, a food retailer. The val- wion report, which was completed at the end of 2010, concluded an intrinsic value per re of R11.00 for Amersheen. The share price at that time was R8.25. Nkomo points out wMahlangu that, in late 2010, Amersheen announced a significant restructuring charge, es- ed at R2 million, that would be reported as part of operating carnings in Amersheen's Cost of equity aer- for nt 510 Equity Asset Valuation 2010 annual income statement. Nkomo asks Mahlangu the following question about dhe n strucruring charge: Bar 21 Jac A. Question 3 What was the correct way to treat the estimated R2 milion restracturing B. charge in my 2010 valuation report? Satisfied with Mahlangu's response, Nkomo mentions to Mahlangu that Amersheen te cently (near the end of 2011) completed the acquisition of a chain of convenience soe Nkomo requests that Mahlangu complete, as of the beginning of 2012, an updated valuaion of Amersheen under two scenarios 12 If the A B. Scenario 1 Estimate the value of Amersheen shares using a multistage residual in (RI) model with the data provided in Exhibit 3. Under Scenario 1, expected ROE in 2015 is 26 % but it is assumed that the firm's ROE will dowy de cline towards the cost of equity thereafter. 23. TH A . Scenario 2 Estimate the value of Amersheen shares using a multistage tesidual incm (RI) model with the data provided in Exhibit 3 but assume that, at the d of 2014, share price is expected to equal book value per share. 24. U A B EXHIBIT 3 Amersheen Data (amounts in South African Rand) 25. L Long-term growth rate starting in 2015 9.0% Expected ROE in 2015 26 % Current market price per share Book value per share, beginning of 2012 Cost of equity R16.55 R7.60 10% Persistence factor 0.70 2012 2013 2014 Expected earnings per share Expected dividend per share R3.28 R3.15 R2.90 R2.46 R2.36 R2.06 18. Based upon the information in Exhibit 1, the market value added of the hypothetical firm is closest to: A. R65 million. B. R113 million. C. R168 million. 19. The most appropriate response to Nkomo's Question 1 would be that the present value of future residual earnings is expected to be: A. zero. B. positive. C. negative. 20. The most appropriate response to Nkomo's Question 2 would be that the firm's return on equity (ROE) is A. equal to the firm's cost of equity. B. lower than the firm's cost of equity. C. higher than the firm's cost of equity Residual Income Valuation Chiepter the information in Exhibit 2, the intrinsic value per share of the equity of 21. Based upon Jackson Breweries is closest to: A. R97.67. B. R130.22, C. R186.03, 511 22. If Nkomo's 2010 year-end estimate of Amersheen shares intrinsic value was accurate, then Amersheen's shares were most likely. A overvalued. B. undervalued, C. fairly valued. 23. The most appropriate treatment of the estimated restructuring charge, In response to Nkomo's Question 3, would be: A an upward adjustment to book valuc R. an upward adjustment to the cost of equity. exclude it from the estimate of net income 24. Under Scenario 1, the intrinsic value per share of the equity of Amersheen is clesest to: A. R13.29. B. R15.57 C.R16.31. 25. Under Scenario 2, the intrinsic value per share of the equity of Amersheen is closest to: A. R13.29. B. R15.57. C.R16.31