Question

You are in the process of revaluing a portfolio on behalf of a Private Equity fund. Thankfully, each one of

the underlying companies currently pays dividends. You have been provided with the additional information

related to each company:

Company Information

Company	Top_Notch	Yeeha	Congrats
Last dividend	12	108	26
Growth years 1-3	10%	-5%	14%
Growth years 4-6	8%	-4%	11%
Long-term growth	5.5%	5.5%	5.5%
Beta	1.08	0.66	0.91
EMRP	6%	6%	6%

Assuming that the current yield to maturity on the R186 bond is 7,8%, calculate the value of each company

and the overall portfolio assuming a percentage holding of 35%, 30%, 35% in Top-Notch, Yeeha! and

Congrats respectively.

Answer 1

For Top_Notch

D1= D0*1.1 = 12*1.1 = 13.2

D2=D1*1.1

D3=D2*1.1

D4= D3*1.08

D5= D4*1.08

D6=D5*1.08

D7=D6*1.055

Now , as per CAPM, required rate of return (r) = 7.8%+1.08*6% = 14.28%

Horizon value at the end of 6 years = H6 = D7/(r-long term growth)

Using the same formulas , the values of D1-D6 and H6 are calculated for all companies and

Value of the company is calculated as

V = D1/(1+r)+ D2/(1+r)^2+...+D6/(1+r)^6+ H6/(1+r)^6

The values are calculated and shown in the table below

	Top_notch	yeeha	Congrats
r	0.1428	0.1176	0.1326
D0	12	108	26
D1	13.2	102.6	29.64
D2	14.52	97.47	33.7896
D3	15.972	92.5965	38.52014
D4	17.24976	88.89264	42.75736
D5	18.6297408	85.3369344	47.46067
D6	20.12012006	81.92345702	52.68134
D7	21.22672667	86.42924716	55.57882
H6	241.7622627	1380.6589	716.2219
Value	170.6082796	1092.687271	494.7338

Value of Top_Notch = 170.61

Value of Yeeha = 1092.69

Value of Congrats = 494.73

Value of overall portolio = 0.35*170.61+0.30*1092.69+0.35*494.73 = 560.68