Question

Zambeef Products PLC is principally involved in the production, processing, distribution and retailing of beef, chicken, pork, milk, dairy products, eggs, stock feed and flour. The Group also has large row cropping operations (principally maize, soya beans and wheat), with approximately 7,787 hectares of row crops under irrigation which are planted twice a year, and a further 8,694 hectares of rainfed/dryland crops available for planting each year. The company is listed on the Lusaka Stock Exchange and the London Stock Exchange. Historically the earnings of the company have been growing at a compound annual growth rate of 11% per annum, for the past five years. It is envisaged that the company will continue to grow at this rate for the next 3 years, and thereafter, grow at a constant rate of 3% forever. Assume that the most recent dividend per share paid is K0.35. The Book Value of Equity is K2 897 477 000, the Earnings Available for Ordinary Shareholders is K4 037 000 and the company currently has 300 580 000 ordinary shares in issue. Historically, the Lusaka Stock Exchange All Share Index (LASI) recorded an annual return of 18.5%. The risk-free rate as proxied by the treasury bill yields is currently 14%, and assume that the company beta is 0.24.

Based on the information above, answer the following questions:

i. Using the CAPM, calculate the required return for Zambeef

ii. Calculate the share Price of Zambeef

iii. Calculate the market to book ratio of Zambeef

iv. Calculate the Price to Earnings Ratio of Zambeef

v. Assuming that the yields on the treasury bills reduces to 12 percent, and the beta of Zambeef increases to 0.4, calculate the new share price of Zambeef.

Answer 1

Zambeef Products PLC ;

i. Caluclating the required return;

  Lusaka Stock Exchange return ( Market Return) = Rm= 18.5%

Risk free Return=Rf = 14%

Beta factor = 0.24

CAPM Return = Rf + Beta ( Rm-Rf)

CAPM Return = 0.14 + 0.24 ( 0.185 - 0.14)

CAPM Return = 0.1508 i.e, 15.08%

II Caluclation of share price of Zambeef;

Growth rate for the upcoming 3 years = 11%

Growth rate from 4th year onwards = 3%

Dividend Paid ( DPS) = K 0.35

Required return as caluclated above (Ke) = 15.08%

share Price (P0) = {DPS(1+g)} / (Ke-g)------------ For continuous growth

Share Price P0 = {DPS(1+g)} / (1+Ke)-----------For normal growth

So,

Dividend caluclation as follows;

Year	Dividend
1	0.389	0.35*(1+0.11)
2	0.431	0.389(1+0.11)
3	0.479	0.431(1+0.11)
4	0.493	0.493(1+0.03)

Share price= 0.389 * PVF ( 15.08%, 1st Year)+ 0.431* PVF ( 15.08%, 2nd Year) + 0.479*PVF ( 15.08%, 3rd Year)+ {PVF ( 15.08%, 3rd Year) * [0.493/(0.1508-0.03)] }

= 0.389*0.869 + 0.431 * 0.755 + 0.479 * 0.656 + (0.656) * 0.493 / 0.1208

= 0.338 + 0.325 + 0.314 + 2.677

Share price = 3. 654

III. Market to Book value ratio

   Market Value = No of shares oustanding * share price

= 300,580,000 * 3.654

= 1,09,83,19,320--------------A

Book Value = 2,89,74,77,000-----------------B

Market to book value ratio = A/B

= 0.379 : 1

IV. Price earning ratio ( PER);

  PER = Market Price / Earning per share

Earning per share = Net income / no of shares outstanding

= 40,37,000 / 300,580,000

EPS = 0.0134

PER = MPS/EPS

= 3.654 / 0.0134

PER = 273 times

V. Caluclation of new share price;

Lusaka Stock Exchange return ( Market Return) = Rm= 18.5%

Risk free Return=Rf = 12%

Beta factor = 0.4

CAPM Return = Rf + Beta ( Rm-Rf)

CAPM Return = 0.12 + 0.4 ( 0.185 - 0.12)

CAPM Return = 0.146 i.e, 14.6%

New share price =  0.389 * PVF ( 14.6%, 1st Year)+ 0.431* PVF ( 14.6%, 2nd Year) + 0.479*PVF ( 14.6%, 3rd Year)+ {PVF ( 14.6%, 3rd Year) * [0.493/(0.146-0.03)] }

= 0.389*0.873 + 0.431 * 0.761 + 0.479 * 0.664 + (0.664) * 0.493 / 0.116

= 0.3396 + 0.328 + 0.318 + 2.822

New share price = 3.8076