QUESTION 2

Zambeef Plc is listed on the Lusaka Securities Exchange and has a dispersed shareholding. The Company has not paid a dividend for past five (5) years and therefore, the company management is considering changing the dividend policy. One of the directors suggested that if the company changes the dividend policy, a share valuation exercise should be undertaken to determine if the change will affect the value of the company. Zambeef has in issue 9% bonds which are redeemable at their par value of K100 in five (5) years time. Alternatively, each bond may be converted on that date into 20 ordinary shares of the company. The current ordinary share price of Zambeef Co is K5 and this is expected to grow at a rate of 7% per year for the foreseeable future. Zambeef has a cost a debt of 7% per year .

REQUIRED:

1. Explain the circumstances under which a share valuation will be necessary to be undertaken. 8 matks.
2. Discuss whether a change in dividend policy will affect the share price of Zambeef Plc. 4 marks
3. Calculate the following current values for each K100 convertible bond:

1. Market value;
2. Floor value;
3. Conversion premium 8 marks