f Page 3 of 5 QUESTION 3 [30 MARKS] (a) Distinguish briefly between the following three main valuation models: () Present value model C) The Gordon's Dividend Valuation Models and (ii) Valuation models based on P/E ratio [9 marks] (b) The following financial information relates to Bella Ltd. The dividend per share is currently $2.00. It is expected that the dividends of Bella Ltd will grow in the future at a rate of 7% per year. The following additional information is provided: Equity beta 1.5 Risk tree rate of return 2.3% Return on the market 8.3% The share price of the company is $60 per share. Required (0) Using the Capital Asset Pricing Model (CAPM), calculate the required return on equity of Bella Lid. (4 marks] ) Determine the value of Bella Lid using the Gordon Growth Valuation Model and comment on your results. (4 marks) What is the value of Belia Lid if the required return on equity goes up to 15%? [2 marks] (iv) Assuming the required rate of return is 15%, what is the value of Bella Ltd if the growth rate goes up to 20%? [2 marks] (VWhat can you deduce from the above calculations? [3 marks] (vi) Outline one weakness of the Gordon Growth model as a way of valuing a company and its shares. [2 marks (vii) Discuss how the sources of earnings growth affect the valuation of companies [4 marks) Page 4 of 5