Joyce has never invested in shares before. She has come to you as a prospective finance graduate, for some advice. In your conversations with Joyce, you have determined her Required Rate of Return (RRR) to be 8.25%.

 

 

a) Determine the value of a share in BBB Ltd. if they paid a dividend of $0.5 this year and the dividend is expected to grow by 4.5% indefinitely.

b) Determine the value of a share in CCC Ltd. if in the current year they paid a dividend of $0.75 and this is not expected to change into the foreseeable future.

c) If the market price for each share in parts a) and b) is $10 per share, should Joyce buy either or both shares? Justify your answer.
 

d) Joyce decided to buy 225 000 shares in GGG Ltd., giving her 1.5% ownership in the company (GGG Ltd. currently has 15 000 000 issued shares). One year later, GGG Ltd. announces a private placement of a further 15 000 000 shares, in order to raise funds for their new venture: Project COVID.

(i) Describe two features of a private placement of shares. 

(ii) What is the major disadvantage to Joyce of the above private placement? Include in your answer the effect on her ownership. 

(iii) Identify one other source of equity funding Joyce, as a shareholder, would prefer. Justify your choice.

 

e) Joyce's friend Arca is a 23-year old with no debt to his name. He is frustrated by the change in the interest he receives from savings. Fortunately for him, he is an essential worker, hence his income will not be affected. Under Joyce's recommendation, Arca came to you for investment advice. 

Explain the recommendations you would make to Arca by using what you have learnt in MAF101?