Question

Sophie is considering investing in company ABC Ltd. whose shares are currently trading on the market at a price of $5.60. ABC Ltd. has just paid a dividend on $0.40 per share. The company has stated that they expect the dividend to grow at a rate of 3% per year. Sophie has a required rate of return for investing in this company of 11%.

1. Give two examples of types of announcements companies are required to disclose to investors when listed on a stock exchange.
2. Calculate the theoretical price of a share in XYZ Ltd.
3. Given the current market price, would you recommend that Sophie invest in XYZ Ltd. based on your answer in part (b)? Explain why/why not.

Answer 1

a.

Two types of announcements companies are required to disclose to investors:
I. Announcements related to to change in a dividend payment will be disclosed to the investors.
II. The Announcements related to change in business combinations like mergers and acquisitions or demerger should be disclosed to the investors.

b.

Theoretical price of share = (expected dividend/( required return- growth rate)
                                               = (.4(1.03)/(.11-.03)
                                               = $ 5.15.

c.

YES, Sofia should be investing in the shares of company because the intrinsic value of company is lower than the market price of company and the company is currently undervalued in the market.

a.

Two types of announcements companies are required to disclose to investors: