XYZ Limited had the following amount of earnings after tax for the last five years Year 2012 2013 2014 2015 2016 Earnings after tax ‘000’ 3000 3240 3420 3816 4000 The firm does not have preference share capital. For the year ending 31st December 2016, the

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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XYZ Limited had the following amount of earnings after tax for the last five years

Year

2012

2013

2014

2015

2016

Earnings after tax ‘000’

3000

3240

3420

3816

4000

The firm does not have preference share capital. For the year ending 31st December 2016, the firm had 800,000 ordinary shares outstanding and has always retained 20% of its earnings after tax. The rest is paid out as dividends. In the year 2016, dividends are expected to grow at a constant growth rate p.a. in perpetuity equal to the growth rate in the last five years. Interest rate on treasury bills is 10% and the average market return is 15%. The equity beta for the firm is 0.8. Required: Compute the theoretical value of each ordinary share.

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