Consider the case of PEC, which is a public company. It has 200 million shares of common stocks listed on the local stock exchange. The price of a share of PEC in early January is $ 15.97. the PEC balance sheet at the end of December indicates a book value of equity of $2,000 million. This implies that the price of the shares according to the balance sheet information is only $10. PEC reported earnings after tax (EAT) of $230 million for the year ending in December and distributed to its shareholders a total annual cash dividend of $160 million. The risk-free rate is the prevailing rate on 10-year government bond rate is 3.5 % and market return is 8.5%. The PEC's beta is estimated to be 1.1 Required: (a) Calculate per share analysis and return on equity (ROE) and briefly discuss why these ratios are important. (4 marks) (b) Estimate the cost of equity and state clearly the limitations of model used in your calculations? (3 marks) (c) Using constant dividend-growth model estimate the price of a share of PEC Co. (5marks) (d) Explain why the price of a share of PEC in early January $15.97 determined in the market is different from both book and constant dividend-growth model. (3 marks) (e) State clearly any assumptions that you made in your calculations. (2marks) Consider the case of PEC, which is a public company. It has 200 million shares of common stocks listed on the local stock exchange. The price of a share of PEC in early January is $ 15.97. the PEC balance sheet at the end of December indicates a book value of equity of $2,000 million. This implies that the price of the shares according to the balance sheet information is only $10. PEC reported earnings after tax (EAT) of $230 million for the year ending in December and distributed to its shareholders a total annual cash dividend of $160 million. The risk-free rate is the prevailing rate on 10-year government bond rate is 3.5 % and market return is 8.5%. The PEC's beta is estimated to be 1.1 Required: (a) Calculate per share analysis and return on equity (ROE) and briefly discuss why these ratios are important. (4 marks) (b) Estimate the cost of equity and state clearly the limitations of model used in your calculations? (3 marks) (c) Using constant dividend-growth model estimate the price of a share of PEC Co. (5marks) (d) Explain why the price of a share of PEC in early January $15.97 determined in the market is different from both book and constant dividend-growth model. (3 marks) (e) State clearly any assumptions that you made in your calculations. (2marks)
