Finance

Question 1

German Resources is involved in coal mining. The company is currently profitable and is expected to pay a dividend of € 4 per share next year. The company has suspended exploration, however, and because its current mature operations exhaust the existing mines, you expect that the dividends paid by the company will decline forever at an 8 percent rate. The required return on German Resource ’ s stock is 11 percent. Using the DDM, estimate the value of the stock.

Answer: r=11%, g=-8%, D1=4, V0=D1/ (r-g) = 4 / (11%-(-8%))=4 / 19%= €21.05

Question 2

Assorted Fund, a UK - based globally diversified equity mutual fund, is considering adding Talisman Energy Inc. (Toronto Stock Exchange: TLM) to its portfolio. Talisman is an independent upstream oil and gas company headquartered in Calgary, Canada. It is one of the largest oil and gas companies in Canada and has operations in several countries. Brian Dobson, an analyst at the mutual fund, has been assigned the task of estimating a fair value of Talisman. Dobson is aware of several approaches that could be used for this purpose. After carefully considering the characteristics of the company and its competitors, he believes the company will have extraordinary growth for the next few years and normal growth thereafter. He has therefore concluded that a two - stage DDM is the most appropriate for valuing the stock.

Talisman pays semi-annual dividends. The total dividends during 2006, 2007, and 2008 have been C $ 0.114, C $ 0.15, and C $ 0.175, respectively. These imply a growth rate of 32 percent in 2007 and 17 percent in 2008. Dobson believes that the growth rate will be 14 percent in the next year. He has estimated that the first stage will include the next eight years.

Dobson is using the CAPM to estimate the required return on equity for Talisman. He has estimated that the beta of Talisman, as measured against the S & P/TSX Composite Index (formerly TSE 300 Composite Index), is 0.84. The...