QUESTION 1

Zimnat Life pays no cash dividends currently and is not expected to for the next 5 years. Its latest earnings per share (EPS) was P10, all of which was re-invested in the company. The firms expected return on equity (ROE) for the next 5 years is 20% per year, and during this time it is expected to continue to re-invest all of its earnings. Starting 6 years from now the firms ROE on new investment is expected to fall to 15% and the company is expected to start paying out 40% of its earnings in cash dividends, which it will continue to do forever after. Zimnat's market capitalisation rate is 15% per year

REQUIRED

i.Estimate the intrinsic value per share for the firm (10 marks)

ii.Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the year and the year after (5 marks)

iii.What effect would it have on your estimate of the intrinsic value if you expected Zimnat to pay out only 20% of earnings starting year 6 (5 marks)