QUESTION 1

An analyst is conducting a valuation of CoCo Limited; it pays no dividends and all earnings are reinvested. The firm is expected to exhibit a ROE of 25% over the next three years. The book value per share of CoCo Limited is currently R100 and the required return on equity is 10%. Forecasted earnings in years one to three are equal to ROE multiplied by the beginning book value. Calculate the intrinsic value of CoCo Limited by using a residual income model, assuming the residual income will remain constant forever at year three's residual income.

QUESTION 2

Zani Limited has earnings per share of R2.00 and a retention rate of 25%. The company will grow at 20% per year for the next two years, followed by 10% for one year and then settle at a 5% per year growth indefinitely. The required rate of return is 11%. Use the three-stage dividend discount model to calculate the intrinsic value of Zani Limited.