Part A

New Trade Ltd is foreseeing a growth rate of 15% per annum in the next three years. It is likely to fall to 12 per cent in the fourth year. After that, the growth rate is expected to stabilize at 7 per cent per annum. If the last dividend paid was Rs.10 per share and the investors required rate of return is 20 per cent, calculate the maximum price at which you will be prepared to buy the companys shares. (9 marks)

Part B

The dividend growth model also has its fair share of criticism. While some have hailed it as being indisputable and being not subjective, recent academicians and practitioners have come up with arguments that make you believe the exact opposite. Recent studies have unearthed some glaring flaws in what was considered to be a perfect valuation model.

Required: Identify and explain THREE (3) weaknesses of the dividend growth model as a way of valuing a company with shares. (6 marks)

Part C:

i) Suppose a friend of yours purchases a zero coupon bond for Rs214.55 with a face value of Rs1,000 maturing in twenty years. If the yield to maturity (YTM) on the bond remains unchanged, what will the price of the bond be at the end of five years from now? (6 marks)

ii) Discuss why stocks are riskier than bonds? (4 marks)

Part D:

You are currently 25 years of age. You have developed a lifetime budget that includes Rs500,000 at age 40 for a college fund for your kids and Rs250,000 per year for 20 years to supplement your retirement, the first payment on your 60th birthday and the last payment on your 79th birthday. You open an investment account on your 25th birthday that promises to pay 9% interest compounded annually. You want to deposit equal annual amounts into the account every year on your birthday, starting today (your 25th birthday) and continuing until you are 40 years old (i.e., the last deposit is made on your 40th birthday). How much will each deposit have to be if you want to meet your financial goals? (10 marks)