Financial Strategy

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|FINANCIAL STRATEGY |

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Question 1

b

1 b

2

3 c

4 d

5 a

6

7 a

8

9

10

11

12

13

14

Question 2

Part A

a)

b)

Part B

a)

i) Price/earnings ratio = Market price of share / Earnings per share

= 330c/ 40c

= 8.25

ii) Dividend growth model = (D1/ Share price) + g

E(Ri) = (26.2/330) + 5.9

= 7.9 + 5.9

= 13.8%

D1 = dividend next year

= Current dividend x growth

= (Dividend one year ago x growth) x growth

= 26.2c

b) The current market value for Dancer Limited would be its current share price of R3.30 times the number of ordinary shares issued equaling R16.5 million. The PE ratio of Dancer is lower than the average sector PE ratio of 10 implying that Photo may be inclined to put in a bid of less than R16.5 million given the implied less than average future earnings.

However the dividend yield for Dancer suggests an estimated return of 13.8% which is significantly higher than the return on the market of 10.6% and should make putting in a bid for Dancer Limited an attractive prospect.

Question 3

Part A

a)

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b) There is an inverse relationship between the coupon rate and the duration of the bond. When the coupon rate increases...