Question

QUESTION 1

An analyst is conducting a valuation of CoCo Limited; it pays no dividends and all earnings are reinvested. The firm is expected to exhibit a ROE of 25% over the next three years. The book value per share of CoCo Limited is currently R100 and the required return on equity is 10%. Forecasted earnings in years one to three are equal to ROE multiplied by the beginning book value. Calculate the intrinsic value of CoCo Limited by using a residual income model, assuming the residual income will remain constant forever at year three's residual income.

QUESTION 2

Zani Limited has earnings per share of R2.00 and a retention rate of 25%. The company will grow at 20% per year for the next two years, followed by 10% for one year and then settle at a 5% per year growth indefinitely. The required rate of return is 11%. Use the three-stage dividend discount model to calculate the intrinsic value of Zani Limited.

Answer 1

	Q.1.
	Intrinsic value by Residual Method
	CoCo Lts
	Details	Amt in R
	Current Book Value per share	100
	ROE =	25%
	Forecast Earning in Perpetuity=100*25%=	25
	Required Return on Equity =	10%
	PV of all Future Earnings =25/10%=	250
	Intrinsic Value by Residual Method =Current Book Value+PV of Future
	Earnings
	So Intrinsic value per share =100+250=	R 350

	Q2.
	Intrinsic Value by three stage Dividend discount model
	Zani Ltd
	Intrinsic share value calculation
	Particulars	Amt R
	EPS	2
	Retention Rate	25%
	Dividend Pay out	75%
	Current Dividend per share =200*75%=	1.5
	Cost of Equity =	11%

			Year 1	Year 2	Year 3	Year 4
	Dividends per share for next two years @20% growth		1.8	2.16
	Dividend in Year 3 with 10% growth				2.376
	Terminal Value of Dividend at Yr 5 with 5% pa perpetual growth =D0(1+g)/(k-g)=2.376*1.05/(11%-5%)					41.58
a	Value of dividends per share receivable in various year		1.80	2.16	2.38	41.58
b	PV Factor @11%=1/1.11^n		0.901	0.812	0.731	0.659
c	PV of Dividends =a*b		1.62	1.75	1.74	27.40
	Intrinsic Value per share =Sum of ( c )	32.51
	So Intrinsic value per share of Zani Ltd=	R 32.51