MoviePlex Ltd is a company that owns and runs cinema complexes across the country. The Covid-19 crisis has led to them being shut down for a period of three months. The new social distancing rules suggest that when they re-open they are going to be able to admit a significantly reduced number of people to each show. The share price has fallen by 75% from R10/share at the end of January 2020 to R2.50/share at the end of June 2020.

a. Explain why it might be rational for the share price of a company to go down given the effects of the current ongoing Covid-19 crisis. In your answer explain how a share is valued using the Dividend Discount model and how the crisis might affect the inputs used in this calculation. No calculations are required for this answer.

(4 marks)

b. The following information relating to dividends was presented by management at the company's Annual General Meeting (AGM) at the end of January: 2020 dividend of 90c/share at the end of the year and thereafter a long term growth rate of 5.2% p.a. is predicted for all future dividends . Assuming you believe management in this regard, show that, given this information and the use of a discount rate of 15%, a fair price estimate of the share at that point in time would have been R10.04.

(9 marks)

c. The company has just come out with an update. The new post-lockdown business model is outlined: it will be able to open immediately at 50% of the level of earnings communicated to investors at the AGM in January . All else being equal, explain what you would expect to happen to the share price (currently R2.50) and why? (NB: no calculations are expected for this answer)

(2 marks)

d. Explain the fundamental differences between the Free Cash to Firm (FCFF) and the Free Cash to Equity holders (FCFE) valuation approaches. In your answer you should explain the differences in cash flows and discount rates used in both methods.