Mulobezi Ltd has announced that it has finalized an agreement to handle the production of a successful product currently marketed by a foreign company. Sitwala decides to value Mulobezi Ltd using the dividend discount model (DDM) and the free cash flow to equity (FCFE) model. After reviewing Mulobezi Ltd.s financial statements in Tables 1, 2, and 3 and forecasts related to the new production agreement, Sitwala concludes the following:

Mulobezi Ltd.s earnings and FCFE are expected to grow 17 percent per year over the next three years before stabilizing at an annual growth rate of 9 percent.

Mulobezi Ltd will maintain the current payout ratio.

Mulobezi Ltd.s beta is 1.25.

The government bond yield is 6 percent and the market equity risk premium is 5 percent.

Required:

a. Calculate the value of a share of Mulobezi Ltd.s common stock using the two-stage DDM. Show your calculations.

b. Calculate the value of a share of Mulobezi Ltds common stock using the two-stage FCFE model. Show your calculations.

Sitwala is discussing with a corporate client the possibility of that client acquiring a 70 percent interest in Mulobezi Ltd.

c. Discuss whether the dividend discount model (DDM) or free cash flow to equity (FCFE) model is more appropriate for this clients valuation purposes