Question

(1)
You have decided to expand the size of your business and will require $4,775,000 to complete the expansion. Using the information below, how many shares would you have to sell to raise the necessary funds (please round up to the nearest whole number):

• You plan to sell the shares today and anticipate that you will not be able to pay any dividends until exactly 7 years from today;
• That first dividend will be $1.70 per share;
• The value of the dividends will subsequently decline at 4% p.a. for the next 3 years, after which they will grow at 3.5% p.a. in perpetuity; and,
• Dividends are paid annually, and the required rate of return on equity is 0.2605644517% per fortnight.

Answer 1

required rate of return annual	fortnightly rate*12*2	.2605644517%*2*12	6.25%
Year	expected dividend = dividend in year 8*(1+growth rate)^n n =1,2,3,4
8	1.7	1.7
9	1.7*(1-0.04)^1	1.632
10	1.7*(1-0.04)^2	1.56672
11	1.7*(1-0.04)^3	1.5040512
12	1.5040*1.035^1	1.55664
Horizon value in year 2011 =expected dividend in year 12/(required rate of return-growth rate)	1.55664/(6.25%-3.5%)	56.61
Year	cash flow	present value factor at 6.25% =1/(1+r)^n r =6.25% n=8,9,10,11	present value of cash flow = cash flow*present value factor
8	1.7		1.046688401
9	1.632		0.945713755
10	1.56672		0.854480193
11	1.5040512		0.772047986
11	56.61		29.05608961
Intrinsic value of stock =sum of present value of cash flow			32.68
No. of shares needed to sell to acquire the necesarry funds	amount required/value of share	4,775,000/32.68	146114