Zimnat life paid no cash dividends currently and is not expected for the next five years. Its earning per share was P10, all of which was re-invested in the company. The firms expected return on equity encourages rate of return for the next five years is 20% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting 6 years from the firm's rate of return on new investment is expected to fall to 15% and the company is expected to start paying out 40% of its earning in cash dividends which will continue to do forever after Zimnat's market capitalization rate is 15% per year.

REQUIRED

i.Estimate the intrinsic value per share of the firm (10 marks)

ii.Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year and the year after (5 marks)

What effect would it have on your estimate of the intrinsic value if you expected Zimnat to pay out only 20% of earnings starting in year 6?