Question

Kathonzweni Holdings Limited has investment interests in three companies. Kanzokea Video Limited (KVL), Kithuki Hauliers Limited (KHL) and Mbuvo Fisheries Limited (TFL). The following financial data relate to these companies.

1.         As at 31 December 2001, the financial statements of two of the companies revealed the following information:

Company	Price of share Sh.	Earnings per share Sh.	Dividend per share Sh.
Kanzokea Video Ltd. (KVL) Kithuki Hauliers Ltd. (KHL)	160 270	8 18	8 9

                       

            2.         Earnings and dividend information for Mbuvo Fisheries Ltd. (TFL) for the

                        past five years is given below:

Year ended 31 December	1997 Sh.	1998 Sh.	1999 Sh.	2000 Sh.	2001 Sh.
Earnings per share Dividend per share	5.0 3.0	6.0 3.0	7.0 3.5	10.0 5.0	12.0 5.5

The estimated return on equity before tax required by investors in Turkana Fisheries Ltd.’s shares is 20%.

            Required:

            (i)        For Kanzokea Video Ltd. (KVL) and Kithuki Hauliers Ltd. (KHL), determine

                        and compare:

• Dividend yields                                                                      
• Price/Earnings ratios                                                                         
•      Dividend covers.                    

(ii)Using the dividends growth model, determine the market value of 1,000 shares held in Mbuvo Fisheries Ltd. (TFL) as at 31 December 2001.

Answer 1

The values provided in the question are,

A) Kanzokea Video Ltd. (KVL)

Price of Share - 160

Earning per Share - 8

Dividend per Share - 8

B) Kithuki Hauliers Ltd. (KHL)

Price of Share - 270

Earning per Share - 18

Dividend per Share - 9

C) Mbuvo Fisheries Ltd. (TFL)

Year ended 31 December	1997 Sh.	1998 Sh.	1999 Sh.	2000 Sh.	2001 Sh.
Earnings per share Dividend per share	5.0 3.0	6.0 3.0	7.0 3.5	10.0 5.0	12.0 5.5

Estimated Return on Equity before tax = 20%

Solution:

(i) For Kanzokea Video Ltd. (KVL) and Kithuki Hauliers Ltd. (KHL), determine

and compare:

a ) Dividend Yields

Dividend Yield = Dividend per Share / Current Share Price

For Kanzokea Video Ltd. (KVL)

Dividend Yield = 8/160

Dividend Yield = 0.05

Dividend Yield = 5%

For Kithuki Hauliers Ltd. (KHL)

Dividend Yield = 9/270

Dividend Yield = 0.033

Dividend Yield = 3.33%

A high dividend yield, however, could signify a good long - term investments as companies’ dividend policies are generally fixed in the long run.

Here Kanzokea Video Ltd. (KVL) company has higher dividend yield than Kithuki Hauliers Ltd. (KHL)

b ) Price / Earnings Ratio (P/E Ratio)

P/E Ratio = Current Stock Price / Earnings per Share

For Kanzokea Video Ltd. (KVL)

P/E Ratio = 160 / 8

P/E Ratio = 20

P/E Ratio = 20

For Kithuki Hauliers Ltd. (KHL)

P/E Ratio = 270 / 18

P/E Ratio = 15

P/E Ratio = 15

A high P/E ratio could mean that a company's stock is over-valued, or else that investors are expecting high growth rates in the future.

Here Kanzokea Video Ltd. (KVL) company has high P/E Ratio than Kithuki Hauliers Ltd. (KHL)

c ) Dividend Covers

Dividend Covers = Earnings per Share / Dividend per Share

For Kanzokea Video Ltd. (KVL)

Dividend Covers = 8 / 8

Dividend Covers = 1

Dividend Covers = 1

For Kithuki Hauliers Ltd. (KHL)

Dividend Covers = 18 / 9

Dividend Covers = 2

Dividend Covers = 2

The higher the coverage ratio, the easier it should be to make interest payments on its debt or pay dividends.

Here Kithuki Hauliers Ltd. (KHL) company has higher Dividend coverage ratio than Kanzokea Video Ltd. (KVL)

(ii)Using the dividends growth model, determine the market value of 1,000 shares held in Mbuvo Fisheries Ltd. (TFL) as at 31 December 2001.

Dividend Discount Model

P = D1 / r - g

Where,

P = Stock Price

D1 = Value of next year Dividend

r = Constant cost of equity capital

g = Constant growth rate in perpetuity

D1 = 5.5

r = 20%

g = Average of Annual Growth Rate

The growth rates are,

= Current Dividend / Last year Dividend

Year 1 - N/A

Year 2 - 3 / 3 = 1

Year 3 - 3.5 / 3 = 1.17

Year 4 - 5 / 3.5 = 1.43

Year 5 - 5.5 / 5 = 1.1

g = (1 + 1.17+ 1.43 + 1.1) / 4

g = 1.18%

P = 5.5 / (20% - 1.18%)

P = 5.5 / (0.2 - 0.0118)

P = 5.5 / 0.1882

P = 29.22

The market value of 1,000 shares held in Mbuvo Fisheries Ltd. (TFL) is,

= 1000 * 29.22

= 29,220