Question 1 (16 marks)

You are provided with the following information relating to two companies. Assume a one-year holding period.

	BNM (Pty) Ltd	DFR (Pty) Ltd
Annual dividend growth rate	10%	5%
Return on Equity (RoE)	12%	14%
Current share price (P0)	R23.00	R44.00
Expected share price (P1)	R24.00	R40.00
Current dividends (D0)	R2.00	R4.00
Risk-adjusted interest rate (k)	15%	12%

1. 1.1 Define the intrinsic value of a share in your own words. (1)
2. 1.2 Calculate the intrinsic value of BNM (Pty) Ltd and DFR (Pty) Ltd. (4)
3. 1.3 Which share would you buy on the basis of it being undervalued? (1)
4. 1.4 Calculate the Price/Earnings ratio of the two companies, if 60% of earnings are expected to be paid out by BNM (Pty) Ltd and 40% of earnings are expected to be paid out by DFR (Pty) Ltd. (4)

1. 1.5 As an investor, would you rather prefer that the company pays out earnings as dividends for BNM (Pty) Ltd and DFR (Pty) Ltd, or would you rather the dividends get reinvested? Provide reasons for your answer. (2)
2. 1.6Assumethatthedividendsareexpectedtogrowby10%(BNM)and5%(DFR)indefinitely.Calculatethevalueofbothofthecompanies.Assumek=15%forbothcompaniesandassumethesamereinvestmentratesasin1.4.above.(4)

TOTAL MARKS: 16