Question
Company ABC has just announced earnings of $2 per share. Based on the last five years, earnings have grown at a rate of 20% per
Company ABC has just announced earnings of $2 per share. Based on the last five years, earnings have grown at a rate of 20% per annum and the company expects this to continue for the next five years, after which it expects earnings to remain constant forever. The company has a policy of paying out 30% of its earnings as dividends. ABC stock has a beta of 1.2. The yield to maturity on 10-year government bonds is 2% and market risk premium is 10%.
(a) Calculate the current value per share.
(10 marks)
(b) If the stock is currently trading in the market at $10 per share, comment on whether any profits can be made. What form of market efficiency prevails if this occurs? Examine the other two (2) forms of market efficiency and what the observation on the stock price here implies in terms of market efficiency.
(10 marks)
(c) The company plans to issue a 7-year bond in the near future to finance expansion into neighbouring countries. It expects interest rates to fall in 3 years time. State and describe two (2) possible types of bonds the company could issue. Analyse how the company can determine the pricing for its bond issue?
(10 marks)
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