Question 1 (31 marks)

[The following parts are independent.]

1. a) Giggle Inc. had a FCFE of $246M last year and has 123M shares outstanding. The company's WACC is 9% and required return on equity is 10% per year. If the FCFE is expected to grow at 8% forever, what is the intrinsic value of Giggle's shares? (5 marks)

2. b) Boris has borrowed $20,000 on margin to buy shares in ABC Inc., which is now selling at $40 per share. Boris account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share.

   1. i) Will Boris receive a margin call? Show your calculation. (4 marks)

   2. ii) How low can the price of ABC shares fall before Boris receive a margin call? (3 marks)

3. c) SpaceTech Ltd. is expected to pay a per-share dividend next year of $30. The markets consensus is that the firms dividend growth rate of 2% per year (which has been going on for many years) will be maintained in the foreseeable future. SpaceTechs cost of equity is 10% per year.

i) What is the price of a share of SpaceTech? (3 marks)

SpaceTech has the expected dividend growth of 2% because its return on equity is 8% and management retains 25% of the earnings.

ii) What is the earnings per share of SpaceTech next year? (2 marks) iii) WhatisthepresentvalueofgrowthopportunitiespershareofSpaceTech? (3marks)

Suppose SpaceTech is about to announce that it will increase its retention ratio to 50%, effective immediately.

4. iv) What will be the new value of the stock after the change in policy? (5 marks)

5. v) Suppose the market is still unaware of SpaceTechs decision. What kind of option contract should you enter into to profit from this information? And at what exercise price?

   (3 marks)

6. vi) If the dividend policy of SpaceTech Ltd. has not shown a clear relationship to its earnings growth, what other absolute valuation model(s) can you use to value the company? What

cash flows are used in the valuation?

(3 marks)