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Jelly Babies (Pty) Ltd (Jelly Babies) is a well-established manufacturing business in South Africa where the corporate tax rate is 28%. The company manufactures sweets,
Jelly Babies (Pty) Ltd (Jelly Babies) is a well-established manufacturing business in South Africa where the corporate tax rate is 28%. The company manufactures sweets, toys, and food for infants. The company is looking to list on the Johannesburg Securities Exchange (JSE) and would like your assistance with evaluating the initial share price that the company should be listed at. The company recently paid a dividend of R5.60 per share and expect to grow their earnings at a constant growth rate of 6%. The dividend pay-out ratio is expected to remain the same at 75%. Risk-free rate is 6.5% and the market risk premium is 10.5%. Companies in the same industry as Jelly Babies that are listed on the JSE have a beta of 1.15. Jelly Babies has a target debt equity ratio of 60% and incremental borrowing rate of 9%. 4.1 Using the dividend growth model, determine the value of a share in Jelly Babies. (5 marks) 4.2 If the share of Jelly Babies is listed on the market at R50, will a potential buyer believe the share is trading at a discount or at a premium to its true value? Discuss the impact of issuing the share at R50. (2 marks) 4.3 Is Jelly Babies likely to be a defensive or cyclical business in terms of business cycle sensitivity? Briefly explain why? (3 marks) 4.4 Calculate the weighted average cost of capital of Jelly Babies. (4 marks) 4.5 If Jelly Babies provides you with the profit after tax what four key steps would you undertake to determine the value of the shares using a discounted cash flow method (outline the steps in their order from step 1 to step 4 in as much detail as possible). (6 marks)
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