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 UFSK limited 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
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
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
UFSK limited 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
1)
Latest EPS = 300000 /100000 = 3
Dividend payout ratio = 1-retention ratio = 1-0.6 = 0.4
So, latest Dividend D0= 3*0.4 = 1.2
From CAPM. cost of equity = risk free rate+ beta*market risk premium
= 6%+1.2*8% = 15.6%
D1= 1.2*1.08 =1.296
D2= D1*1.08 = 1.39968
D3=D2*1.06 =1.4836608
Horizon value = D4/(cost of equity - constant growth rate) = D3*1.05/(0.156-0.05) =14.69664
So, Value of Stock today = 1.296/1.156+1.39968/1.156^2+1.4836608/1.156^3+14.69664/1.156^3
=12.6425 or 12.64 which is the price to be paid for UFSK Limited stock
2)
Market value of UFSK Limited equity = price of one share * no. of shares
=12.6425* 100000
=1264252.10
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