Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The managers at Kwaito Sounds also believe that they are significantly undervalued, and have asked you to estimate the current value of the Kwaito share.

The managers at Kwaito Sounds also believe that they are significantly undervalued, and have asked you to estimate the current value of the Kwaito share. To enable you to do the valuation, they have provided you with additional information. They believe that they can maintain the 'high growth' for the next five years. The current June 30, 2020 return on capital, debt to equity ratio, dividend payout ratio and interest rate will be maintained for the high growth period. After the high-growth period, the earnings growth rate is expected to drop to 6% and the firm's return on capital will also drop to 15%. The debt to equity ratio and interest rate are expected to remain unchanged. The book value of equity as at 30 June, 2019 was R 100 million (this is the opening book value of equity for the year ending 30 June, 2020) and that of debt is unchanged. Beta (levered) is expected to be 1.00 in the stable growth period. [Hint: ROE = ROIC + (ROIC-i(1-t))*D/E , where D/E is the capital structure in market value terms as in Questions 2A and 2B.]

a. Estimate the expected growth rate in the high growth period. [4 marks] b. Estimate the expected dividends in the high growth period. [3 marks] c. Estimate the expected payout ratio in the stable growth phase. [3 marks] d. Estimate the terminal price (at the end of the high-growth period) [3 marks] e. Estimate the equity value today using the dividend discount model. [2 marks]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Finance Markets Investments And Financial Management

Authors: Daisy Scott

1st Edition

1639892001, 9781639892006

More Books

Students also viewed these Finance questions