Question
Your supervisor has asked you to evaluate the relative attractiveness of the stocks of two very similar chemical companies: Litchfield Chemical Corp. (LCC) and Aminochem
Your supervisor has asked you to evaluate the relative attractiveness of the stocks of two very similar chemical companies: Litchfield Chemical Corp. (LCC) and Aminochem Company (AOC). AOC and LCC fiscal year ends on the 30th June. You have compiled the following data for this purpose.
Use a one-year time horizon and assume the following:
Real gross domestic product is expected to rise 5 percent;
JSE top 40 expected total return of 15 percent;
South Africa (SA) Treasury bills yield 4 percent;
30-year SA Treasury bonds yield 8 percent.
LCC | AOC | |
Current stock price | R40 | R20 |
shares outstanding | 8 million | 14 million |
Projected earnings per share | R5 | R2.3 |
Projected dividend per share | R0.5 | R2.3 |
Projected dividend growth rate | 6% | 8% |
Stock beta | 1.7 | 1.2 |
Investor's required return | 5% | 6% |
Long term debt | R80 million | R120million |
Stock holders' equity | R250 million | R220 million |
Please answer the below, based on the above information:
a. Calculate the value of the common stock of LCC and AOC using the constant growth DDM. Show your work.
b. Calculate the expected return over the next year of the common stock of LCC and AOC using the CAPM. Show your work.
c. Calculate the internal (implied, normalized, or sustainable) growth rate of LCC and AOC. Show your work.
d. Recommend LCC orAOC for investment. Justify your choice using your answers to A, B, and C and the information in Table above.
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