Question $1$

Financial Information relating to Ace Ltd$,$ a listed company, is as follows:

Statement of Financial Position at $31$ December $2022$

APC$314$ Financlal Management $($Professiona$)$

Ace Ltd has a cost of equity of $11\%$ and pays tax at an annual rate of $30\%$ per year. The

ex$-$dividend share price of the company is $$7\mathrm{.}50$ per share. Preference shareholders have

the right to cash in their preference shares at their discretion.

Financial analysts have forecast that the ordinary dividends of Ace Ltd will grow in the

future at an expected rate of $5\%$ per year. The forecast for the growth rate of profit after

tax $($eamings$)$ of the company is $6\%$ per year.

The finance director of Ace Ltd believes that taking into account the risks associated with

the company's expected earnings growth, carnings yield of $12\%$ per year could be used

for valuation purposes.

The current market value of the land and buildings is estimated at $$380$ mil. The net

realisable value of inventories is $$65$ mil. The net realisable value of the machinery is

$$50$mil. The net realisable value of the motor vehicles is $$15$mil.

Required:

a$)$ Calculate the value of Ace Ltd$,$ using the following methods:

$($i$)$ net asset value method

$($ii$)$ dividend growth method

b$)$ Critically evaluate the weaknesses of using the dividend growth model as a method of

company valuation.

$(13$ marks$)$