The Portland Bay Co. has just paid a dividend of $2.00 per share for the year just ended 31 December 2019. The company plans to grow the dividend payout by 3.5% for the next three years, then 4% in years four and five and then 5% thereafter. The equity risk premium for similar stocks listed on the securities exchange is 2.5%. The risk-free rate is currently 8.5% and the Beta for Portland Bay Co. is 1.4.

Required:

(i)Determine Portland Bay's value of the shares using Gordon's dividend growth model.

(10 marks)

(ii)Assuming the price to earnings ratio of Portland Bay Co. is 7.1 times, and the profit after tax is $ 400,000, what would be the value of the company's share? The number of shares outstanding as of 31 December 2019 were 100,000. (5 marks)

(iii)The total assets of Portland Bay Co. as at 31 December 2019 are valued at $ 2.9 million while total liabilities amount to $ 100,000. Assuming the company has 100,000 ordinary shares, what would be the company's share price using the net worth (equity) approach? (5 marks)

(iv) Comment on the results obtained in (i), (ii) and (iii) above. How do they compare? What implications do the results have on an investor wishing to invest in Portland Bay Co.? (5 marks)