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QUESTION FIVE Highlight four advantages of convertible preference shares. 1 marks You love recently joined Gold Invest. an asict management firm specialused in equity investments, as a junior mulyst. Eric Nibet the chief investment officer iCIO) at the firm has a business deal of valuing Horizon Limited and his tishoil you in snidervibe the anignment. You make the following assumptions about the company Book value per share (HVPS) is eatinged at Sh,9 61 on 31 December 2017. 1 - Earnings per share (FI'S) will be 27%% of the beginning book value per shure for the next I year Cush dividends per share paid will be 30. of earnings per share (El'S) At the end of the 3-year period. the market price per share [ MIS) will be iduce times that nes thin. per share. The required rate of forum is $ 3414 Required: Estimate the value per share of Horizon I united want the mevidual income model. If anbed on the value driver with the greatest imjust in multiples analyus undundunalused in equiscly minus "growth" This is caplicitly, tree. but the impact of growth depends on its sourcucucusiness dearfe are several sources of growth and ouch will have a differon effect on value creation and this shinhanhis Required With respect to the above statement? Explain the four primary sources of growth. The market price per shiny of Domini Limited is Sh.35, Manin Wanhis has Sh 1,100,509 :uveu. The borrows an additional sh 14100 00 from Batiki Sick Hubers Lad and invests Sht 2.010,000 in Duminion Limited shares Required: The price at which a margin call will find your assuming y maintenance purgin of 30%% (4 marky) (Total: 20 marks)QUESTION FOUR In relation to dividend discount model (DIM): Describe one strength of the two stage DDM in comparison to the cumplant growth DUN. 12 marks) Explain one weakness common in all DDMS. (2 marks) Kithaka Lenayapa is an analyst at a leading investment bank and is responsible for the following four companies namely: A. B. C and D. All the four companies operate in diverse sectors of the domestic economy. He has gathered the following information regarding the companies Company Rate of' return on equity (ROE) 0.15 Required rate of return 12.10 0.12 Dividend payout ratio ("5) 60 50 Free cash flow to equity (FCFF) 1.25 1 50 2.00 Profit margin (".) 10 17 Required: Justified price to book (I''By ratio for company A 12 marks) (ii) Justified price to sales (1/S) ratio for company Is, (2 marks) Justified forward price to earnings (I'VE) ratio for company C. 12 marks) (iv) Justified price to cash flow (PCF) ratio for company D. (2 marks) CF41 Page 3 Out of 4 Rhino Limited has been unprofitable and has not been paying dividend on its ordinary shares. An analyst decides to value the company using his forecasts un free cash flow to equity (FCFEJ in 2018. Ile guthers the following information: The company has 17 million shares outstanding. 2. Sales will be Sh.5.5 million in 2019, increasing at a rule of 28% annually for the next four years (through 2023) 3. Net income will be 32% of sales, Investment in fixed assets will be 35% of sales, investment in working capital will be 6% of sales, depreciation will be 95% of sales. 5. 20'L of the investment in assets will be financed with debt. 6 Interest expense will be only 2% of sales 7. The tax rate will be 10% The company has a beta of 2.1, the risk-free rate is 6." and the equity risk premium is 5.0% At the end of year 2023, the analyst projects that Rhino Limited will sell for 18 times cummings. Required: The value of one ordinary share of Khito Limited. (8 marks) (Total: 20 marks)