Question 1

Jay Wilson is analyzing two stocks as of December 31, 2017. Both stocks pay a dividend at the end of each year.

Venus Company

After analyzing competitive pressures and financial conditions in the industry, she predicts that Venus Company will lose market share because of new entrants but will stabilize within a few years. The required rate of return for Venus Company is 9.50%. Beginning with a per share dividend of USD 3.25 in 2017, she develops scenarios regarding the growth of dividends of Venus Company.

In her Most Likely Scenario, the growth rate falls from 8% in 2017 to 6% in 2018 and 2019, to 5% in 2020 and 2021, and then to a sustainable rate of 3.5% for 2022 and beyond.

Wakuni Corporation

She also evaluates Wakuni Corporation and uses recent financial data shown in Exhibit 1 to calculate its sustainable growth rate. In addition to this estimate, she performs a sensitivity analysis on the sustainable growth rate whereby the dividend payout ranges from 0% to 10% and the return on equity ranges from 8% to 12%.

Exhibit 1

Selected Data for Wakuni Corporation (JPY billions)

Net income 43,923 Sales 423,474

Total assets, average during year 486,203

Shareholders equity, beginning of year 397,925

Dividends paid 1,518 Required:

1. Under the Most Likely Scenario estimate the value of the Venus Company stock. (15 marks)

2. Using the data in Exhibit 1 estimate the sustainable growth of Wakuni Corporation. (5 Marks