Question $512$ Marks

Investors require a $13\%$ rate of return on Brook Corporation stock $($rs $=13\%).$

$5\mathrm{.}1.$ What would the estimated value of Brook$$s stock be if the previous dividend were Do $=$

R$3\mathrm{.}00$ and if investors expect dividends to grow at constant annual rate of $(1)-5\%,(2)$

$0\%,(3)5\%$ and $(4)10\%?(6)$

$5\mathrm{.}2.$ Using data from Part $5\mathrm{.}1,$ what is the constant growth model$$s estimated value for

Brook$$s stock if the required rate of return is $13\%$ and the expected growth rate is $($i$)13\%$

or $($ii$)15\%?$ Are these reasonable results? Explain. $(4)$

$5\mathrm{.}3.$ Is it reasonable to expect gL $>$ rs$?(2)$

Question $614$ Marks

The current dividend, Do$,$ of a share of Sun International is R$3$ per share. Under the present

conditions, this dividend is expected to grow at a rate of $5$ percent annually for the foreseeable

future. The beta of Sun International$$s shares is $1\mathrm{.}5.$ The risk$-$free rate of return is $7$ percent,

and the expected market rate of return is $12$ percent.

MBA$5903$

MAY$/$JUN $2023$ SUPPLEMENTARY EXAMINATION

$7$

Required:

$6\mathrm{.}1.$ At what price would you expect Sun International common stock $($share$)$ to sell? $(4)$

$6\mathrm{.}2.$ If the risk$-$free rate of return declines to $6$ percent, what will happen to Sun International$$s

share price? $($Assume that the expected market rate of return remains $12$ percent$).$

$(4)$

Sun International$$s management is considering acquisitions in the machine tools industry.

Management expects the company$$s beta increase to $1\mathrm{.}6$ as a result of these acquisitions. The

dividend growth rate is expected to increase to $7$ percent annually. Would you recommend this

acquisition program to management? $($Assume the same initial conditions that existed in Part

$6\mathrm{.}1.)(6)$Question $5$

$12$ Marks

Investors require a $13\%$ rate of return on Brook Corporation stock $(r=13\%).$

$5\mathrm{.}1.$ What would the estimaled value of Brook's stock be if the previous dividend were Do $=$

R$3\mathrm{.}00$ and if investors expect dividends to grow at constant annual rate of $(1)=5\%,(2)$

$0\%,(3)5\%$ and $(4)10\%?$

$5\mathrm{.}2.$ Using data from Part $5\mathrm{.}1,$ what is the constant growth model's estimated value for

Brook's stock if the required rate of return is $13\%$ and the expected growth rate is $($i$)13\%$

or $($ii$)15\%?$ Are these reasonable results? Explain.

$5\mathrm{.}3.$ Is it reasonable to expect $g_L>m?$

Question $6$

$14$ Marks

The current dividend, $D_2,$ of a share of Sun International is R$3$ per share. Under the present

conditions, this dividend is expected to grow at a rate of $5$ percent annually for the foreseeable

future. The beta of Sun Infemational's shares is $1\mathrm{.}5.$ The risk$-$free rate of return is $7$ percent,

and the expected market rate of return is $12$ percent.

Required:

$6\mathrm{.}1.$ At what price would you expect Sun International common stock $($share$)$ to sell?

$6\mathrm{.}2.$ If the risk$-$free rate of return declines to $6$ percent, what will happen to Sun Internationals

share price? $($Assume that the expecled market rate of retum remains $12$ percent$).$

Sun Internafonals management is considering acquisitions in the machine tools industry.

Management expects the company's beta increase to $1\mathrm{.}6$ as a result of these acquisitions. The

dividend growth rate is expecled to increase to $7$ percent annually. Would you recommend this

acquisition program to management? $($Assume the same initial conditions that existed in Part

$6\mathrm{.}1.)$