Case study 1

Part a.

You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Theta Company. You have collected the following data:

Earnings per share at the end of the previous year $20.00 Retention ratio 0.60 Return on equity 0.10 Cost of equity capital 0.15

The company plans to decrease the retention ratio to .40 from year 4.

Required:

i) Estimate the price of an equity share of this company using the two-period dividend discount model and advise your client whether they should buy a share of the company.

ii) Your client is keen to know whether there are any growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations.

iii) If there are positive or negative growth opportunities, explain the reason for such opportunities.

Can you please show excel formula like. step by step, thanks.