You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Theta Company. You have collected the following data: Earnings per share last year $6.00 Payout ratio 0.40 Return on equity 0.30 Cost of equity capital 0.20 The company plans to increase the payout ratio to 60% from year 5. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. iii) If there are positive or negative growth opportunities, explain the reason for such opportunities.
You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Theta Company. You have collected the following data: Earnings per share last year $6.00 Payout ratio 0.40 Return on equity 0.30 Cost of equity capital 0.20 The company plans to increase the payout ratio to 60% from year 5. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. iii) If there are positive or negative growth opportunities, explain the reason for such opportunities.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
You are an investment adviser. One of your clients approaches you for your advice on investing in
equity shares of Theta Company. You have collected the following data:
Earnings per share last year $6.00
Payout ratio 0.40
Return on equity 0.30
Cost of equity capital 0.20
The company plans to increase the payout ratio to 60% from year 5.
Required:
i) Estimate the price of an equity share of this company using an appropriatedividend
discount model and advise your client whether they should buy a share of the company.
ii) Your client is keen to know whether there are any growth opportunities from their
investment. Explain to your client the meaning of this concept using appropriate
calculations.
iii) If there are positive or negative growth opportunities, explain the reason for such
opportunities.
equity shares of Theta Company. You have collected the following data:
Earnings per share last year $6.00
Payout ratio 0.40
The company plans to increase the payout ratio to 60% from year 5.
Required:
i) Estimate the price of an equity share of this company using an appropriate
discount model
ii) Your client is keen to know whether there are any growth opportunities from their
investment. Explain to your client the meaning of this concept using appropriate
calculations.
iii) If there are positive or negative growth opportunities, explain the reason for such
opportunities.
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