Question

Silverline Electricals Limited was founded ten years ago by Jim and Wendy Birt. The company manufactures

and installs both traditional and contemporary models of lights for residential and commercial purposes.

Silverline Electricals Ltd has experienced rapid growth because of the new technology that increases the

energy efficiency of its systems and the introduction of new models of LED integrated lights. The company is

equally owned by Jim and Wendy holding 100,000 shares each.

In August 2018, Jim and Wendy have decided to value their holdings in the company for financial planning
purposes. To accomplish this, they have gathered the following information about their main competitors in
the industry

	EPS ($)	DPS ($)	Share Price ($)	ROE (%)	Required rate (%)
Colonial Lighting	0.42	0.08	7.65	10.5	9.5
Reliable Lighting Plus	0.46	0.26	6.25	11.5	10.5
FullBright Electricals	-0.24	0.27	24.3	12.5	11.5
Industry Average	0.36	0.27	8.24	11.0	10.5

Last year, Silverline Electricals Ltd had an EPS of $0.52 and paid dividends to Jim and Wendy of $31,200 each.

The company also had a return on equity of 15%. Jim and Wendy believe a required rate of return of 12% for

the company is appropriate.

Required:
1. Assuming the company continues its current growth rate (growth rate should be inferred from the
data given) into the infinite period, what is the share price of the company?
(7marks)
2. To verify their calculations, Jim and Wendy have hired Richard Wang, a consultant. Richard was
previously an equity analyst, and he has a good understanding of the electrical Industry. Richard has
examined the company’s financial statements as well as those of its competitors. Although Silverline
Electricals Ltd currently has a technological advantage, Richard’s research indicates that Silverline
Electricals Ltd’s competitors are investigating other methods to improve efficiency. Given this, Richard
believes that Silverline Electricals technological advantage will last for only the next five years. After
that period, the company’s growth is likely to slow down to the industry average. Additionally,
Richard believes that the company’s required return currently is too high and so after year 5, the
industry average required return is a more appropriate rate for valuation. Taking Richard’s
assumptions into consideration, calculate the estimated share price of Silverline Electricals Ltd.

3. What is the industry average price-earnings ratio? What is Silverline Electricals Ltd’s price-earnings
ratio based on Richard’s estimation in part (2) above? Comment on any differences and explain why
these differences may exist?

4. After a discussion with Richard, Jim and Wendy agree that they wanted to increase the value of the
company’s equity. Like many small business owners, they want to retain control of the company and
do not want to sell shares to outside investors. They also feel that the company’s debt is at a
manageable level and do not want to borrow more money. What steps can they take to increase the
share price? - justify each of your suggestions.

Answer 1