Morphosis (Ltd) is a manufacturing company focusing on food production. The company recently paid a dividend of $2,50 per share and plans to increase its dividends by 10% in the first year, 15% in year 2, 20% in year 3 then level off at a constant rate of 5% thereafter. The T-bills are 6,50% and the return on the market is 25%. The standard deviations are 13 and 10 percent for Morphosis and the market respectively. The correlation coefficient between the two is 0,75. a) Calculate the risk premium. What does this mean? b) Determine the required rate of return using CAPM c) Find the intrinsic value of the share using the DDM.
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
Morphosis (Ltd) is a manufacturing company focusing on food production. The company recently paid a dividend of $2,50 per share and plans to increase its dividends by 10% in the first year, 15% in year 2, 20% in year 3 then level off at a constant rate of 5% thereafter. The T-bills are 6,50% and the return on the market is 25%. The standard deviations are 13 and 10 percent for Morphosis and the market respectively. The correlation coefficient between the two is 0,75.
a) Calculate the risk premium. What does this mean?
b) Determine the required
c) Find the intrinsic value of the share using the
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d) Would you buy or sell this share? Why?
e) Explain the difference between common and preference stock holders
f) Suppose the country Morphosis operates in experiences a severe drought. What type of risk is this to the stockholders?
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