You are given the following information regarding UFSK limited, a listed entity. Number of outstanding shares100 000Earnings300 000Retention ratio60%91-day Treasury bill rate6%Market risk premium8%UFSK Beta1.2Dividend growth rate stable phase5%Bonds outstanding5 000Par value per bond1000Semi-annual coupon rate on bonds6%Bond yield to maturity8%Bond years remaining to maturity4Corporate tax rate30%Additional informationUFSKlimited recently paid a dividendUFSK recently signed a deal and expects a super normal growth in earnings. The company expects earnings to grow by 8% for the first two years then decline by 2% in the following year, there after a stable growth of 5% is expected into the future.Required:As an investment analyst advise your client how much must she expect to pay for UFSK limited stock.Ascertain the market value of UFSK limited equity. Determine the fair value of UFSK limited bondDetermine the total value of the company’s debtDetermine the total value of UFSK limited

Answered: You are given the following information…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

You are given the following information regarding UFSK limited, a listed entity.

Number of outstanding shares	100 000
Earnings	300 000
Retention ratio	60%
91-day Treasury bill rate	6%
Market risk premium	8%
UFSK Beta	1.2
Dividend growth rate stable phase	5%
Bonds outstanding	5 000
Par value per bond	1000
Semi-annual coupon rate on bonds	6%
Bond yield to maturity	8%
Bond years remaining to maturity	4
Corporate tax rate	30%

Additional information

UFSKlimited recently paid a dividend
UFSK recently signed a deal and expects a super normal growth in earnings. The company expects earnings to grow by 8% for the first two years then decline by 2% in the following year, there after a stable growth of 5% is expected into the future.

Required:

As an investment analyst advise your client how much must she expect to pay for UFSK limited stock.
Ascertain the market value of UFSK limited equity.
Determine the fair value of UFSK limited bond
Determine the total value of the company’s debt
Determine the total value of UFSK limited

Expert Solution

Step 1

we will only answe the first three subparts for the remaining subparts kindly resubmit the question again and also mention the subparts to be answered.

Step 2

Number of outstanding shares	100 000
Earnings	300 000
Retention ratio	60%
91-day Treasury bill rate	6%
Market risk premium	8%
UFSK Beta	1.2
Dividend growth rate stable phase	5%

$\begin{array}{rcl} r & = & r_{f} + b e t a \times m a r k e t r i s k p r e m i u m \\ = & 6 % + 1.2 \times 8 % \\ = & 15.6 % \end{array}$

$\begin{array}{rcl} D_{0} & = & E P S \times (1 - r e t e n t i o n r a t i o) \\ = & \frac{$ 300000}{100000} \times (1 - 60 %) \\ = & $ 1.2 \end{array}$

The company expects earnings to grow by 8% for the first two years then decline by 2% in the following year, there after a stable growth of 5% is expected into the future.

$D_{1} = 1.2 \times 1.08 = 1.296 D_{2} = 1.2 \times 1 . 08^{2} = 1.39968 D_{3} = 1.21 . 08^{2} \times 0.98 = 1.3716864$

g=5%

$\begin{array}{rcl} h o r i z o n v a l u e & = & \frac{D_{3} \times (1 + g)}{r - g} \\ = & \frac{1.3716864 \times (1 + 5 %)}{15.6 % - 5 %} \\ = & $ 13.59 \end{array}$

$\begin{array}{rcl} p r i c e o f s t o c k & = & \frac{1.296}{1.156} + \frac{1.39968}{1 . 156^{2}} + \frac{1.3716864}{1 . 156^{3}} + \frac{13.59}{1 . 156^{3}} \\ = & $ 11.85 \end{array}$

answer: $11.85

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