You are an investor in Borrow-Happy Ltd., which has a debt-equity ratio of 3:1.Though you have had a good experience thus far, you are influenced by anexpert's advice published in media and decide to move your investment to a firmcalled Equity-Safe Inc. which is completely equity financed. You will do thisby selling off your shares worth $35,000 and use the sales proceeds to partlyfinance your share purchase in the new firm. If you wish to retain the sameearnings that you enjoyed with Borrow-Happy Ltd. how many dollars' worth ofshares you will need to buy in Equity-Safe Inc.? Provide supporting computationsto your response.

To determine the amount of shares you need to buy in Equity-Safe Inc. to retain the same earnings as…

Answered: You are an investor in Borrow-Happy…

SWFT Comprehensive Vol 2020

43rd Edition

ISBN:9780357391723

Author:Maloney

Publisher:Maloney

Chapter14: Property Transact Ions: Capital Gains And Losses, § 1231, And Recapture Provisions

Section: Chapter Questions

Problem 43P

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You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha 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 positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. Notes: You need to show detailed calculations in order to receive full marks for this question 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 sharesof Alpha Company. You have collected the following data:Earnings per share last year $5.00Payout ratio 0.30Return on equity 0.30Cost of equity capital 0.25The company plans to increase the payout ratio to 40% from year 6.Required:i) Estimate the price of an equity share of this company using an appropriate dividend discount modeland advise your client whether they should buy a share of the company.ii) Your client is keen to know whether there are any positive growth opportunities from theirinvestment. Explain to your client the meaning of this concept using appropriate calculations.
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Joyce has never invested in shares before. She has come to you, as a prospective finance graduate, for some advice. In your conversations with Joyce, you have determined her Required Rate of Return (RRR) to be 8.75%. b) Determine the value of a share in CCC Ltd. if in the current year they paid a dividend of $4.25 and this is not expected to change into the foreseeable future. Show formula, variables, calculation and a concluding statement in your response.

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