Clara currently has a portfolio of ordinary shares representing several different companies. Clara considers it to be a well-balanced investment portfolio but she wants to reduce the overall risk of the portfolio a bit more by including ordinary shares from Continental Logistics (Pty) Ltd. From the Continental Logistics shareholders’ report Clara extracted the following information: For the period 2016–2019 the company paid the following dividends per year, respectively: R3.14, R3.55, R3.89 and R3.95. The shareholders’ report indicates that the company’s management believes that the dividend will increase by the average growth rate of the dividends between 2016 and 2019, and that the dividend will increase by 10% per year indefinitely from 2021 onwards. Claire requires a return of 15% on her investment portfolio and she is not prepared to pay more than R52.00 per ordinary share for Continental’s shares. Required: Show all calculations and round off all amounts to two decimals. (A) Use the information provided by Claire to calculate the current price of a Continental Logistics ordinary share. (B) Should Claire purchase Continental Logistics shares for inclusion in her investment portfolio? Provide reasons for your answer.
Question 1
Clara currently has a portfolio of ordinary shares representing several different companies. Clara considers it to be a well-balanced investment portfolio but she wants to reduce the overall risk of the portfolio a bit more by including ordinary shares from Continental Logistics (Pty) Ltd.
From the Continental Logistics shareholders’ report Clara extracted the following information:
For the period 2016–2019 the company paid the following dividends per year, respectively: R3.14, R3.55, R3.89 and R3.95.
The shareholders’ report indicates that the company’s management believes that the dividend will increase by the average growth rate of the dividends between 2016 and 2019, and that the dividend will increase by 10% per year indefinitely from 2021 onwards.
Claire requires a return of 15% on her investment portfolio and she is not prepared to pay more than R52.00 per ordinary share for Continental’s shares.
Required:
Show all calculations and round off all amounts to two decimals.
(A) Use the information provided by Claire to calculate the current price of a Continental Logistics ordinary share.
(B) Should Claire purchase Continental Logistics shares for inclusion in her investment portfolio? Provide reasons for your answer.
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