The valuation of ordinary shares is more complicated than the valuation of bonds and preference shares. Explain the factors that complicate the valuation of ordinary shares. (6 marks)

The most recent financial data for the Rare Watts disclose the following:

Dividend per share Sh.3.00

Expected annual dividend growth rate 6 percent

Current required rate of return 15 percent

The company is considering a variety of proposals in order to redirect the firms activities. The following four alternatives have been suggested:

Do nothing in which case the key financial variables will remain unchanged.

Invest in venture that will increase the dividend growth rate to 7% and lower the required rate of return to 14%.

Eliminate an unprofitable product line. The action will increase the dividend growth rate to 8% and raise the required rate of return to 17%.

Acquire a subsidiary operation from another company. This action will increase the dividend growth rate to 9% and required rate of return to 18%.

Required

For each of the proposed actions, determine the resulting impact price and recommend the best alternative. (Total: 14 marks)