Question

In: Accounting

Sophie is considering investing in company ABC Ltd. whose shares are currently trading on the market at a price of $5.60.

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.

Solutions

Expert Solution

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:

Related Solutions

The stock of Company ABC is currently trading at a price of $50. According to analyst...
The stock of Company ABC is currently trading at a price of $50. According to analyst forecasts, the share price will be either $45 or $55 at the end of six months. Suppose that the risk-free interest rate is 10% per annum with continuous compounding. What is the value of a six-month European put option with a strike price of $50 using the Delta-hedging method as discussed in the lecture notes?
The stock of Company ABC is currently trading at a price of $50. According to analyst...
The stock of Company ABC is currently trading at a price of $50. According to analyst forecasts, the share price will be either $45 or $55 at the end of six months. Suppose that the risk-free interest rate is 10% per annum with continuous compounding. What is the value of a six-month European put option with a strike price of $50 using the Delta-hedging method? Verify your result using the Risk-neutral method.
ABL shares are currently trading at a price of $33, while HHT shares are trading at...
ABL shares are currently trading at a price of $33, while HHT shares are trading at a price of $48.74. The risk-free rate is 1.22% per year. Using the information above, perform each of the following tasks: Find the Black-Scholes price of the call on ABL with a strike price of $34.59 if there is 6 months until the call expires and the annual standard deviation of the stock price is 20%.
Mike owns 4,000 shares in County Ltd, whose current share price (cum rights) is trading at...
Mike owns 4,000 shares in County Ltd, whose current share price (cum rights) is trading at $4.30 per share. County Ltd has been making large profits and wishes to distribute more dividends out to their loyal shareholders. However, they don’t want to change to current dividend payout (amount). They then consider making a share 3 for 4 rights issue with a subscription price of $3.50 per share. Mike wishes to calculate: a)   The value, R of the right to buy...
XYZ LTD shares are currently trading at $9.30. You currently hold a large parcel of shares...
XYZ LTD shares are currently trading at $9.30. You currently hold a large parcel of shares in XYZ and are concerned that the future share price may fall and your investment will decrease in value. You purchase a put option with an exercise price of $8.85 per share and pay a premium of $0.40 per share. Draw a fully labelled diagram of the position you have entered into.
1. an investor considers investing in shares A and B. Stock A is currently trading at...
1. an investor considers investing in shares A and B. Stock A is currently trading at the price of $1000 with price earning ratio (PER) value of 10X, meanwhile stock B is currently trading at the price of $2000 with price earning ratio value of 20X. Its estimated that EPS stock A will increase 50% than its previous EPS in the next 3 months, while EPS stock B will decrease by 50% in the next 3 months. According to that...
You believe that Baobab Ltd shares are the most undervalued. The shares are currently trading at...
You believe that Baobab Ltd shares are the most undervalued. The shares are currently trading at $20 per share and you decide to buy as many shares as possible by placing $10 000 into a margin account. The initial margin requirement is 50%. A. What is the maximum number of shares you will be allowed to purchase? B. Assuming you take the position in part A. above. What will be the return on your investment if the stock price changes...
Tea Ltd is a public company whose common shares are traded in the stock market. Tea...
Tea Ltd is a public company whose common shares are traded in the stock market. Tea recently issued various financial instruments to the public, as described below. (a) 7% convertible bonds with a face value of $1,000 and maturity date on December 31, 2027. Each bond can be converted into whatever number of Tea’s common shares such that the value of the common shares which the holder receives from conversion is equal to $1,500.    5% convertible, cumulative, redeemable preference...
Assume Alpha Ltd is currently trading on the NYSE with a stock price of $65. The...
Assume Alpha Ltd is currently trading on the NYSE with a stock price of $65. The American one-year call option on the stock is trading at $20 with strike price of $65. If the one-year rate of interest is 10% p.a. (continuously compounding), is the call price free from arbitrage or is it too cheap/expensive, assuming that the stock pays no dividends? What if the stock pays a dividend of $5 in one year?
a. An all-equity company ABC has nine million outstanding shares, with a share price currently at...
a. An all-equity company ABC has nine million outstanding shares, with a share price currently at £55. The company also has outstanding debt valued at £75 million. Equity cost of capital is 6.5%. The company has made an announcement of issuing new debt valued at £210 million. The proceeds of this issue will be used to repay outstanding debt and to pay out an immediate dividend. Assume capital markets are perfect. Required: i. What is the share price just after...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT