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Fin3701 assignment 2 Semester 2 2022
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Fin3701 assignment 2 for semester 2 of 2022 solutions. Calculations have been included to aid revision.
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FIN3701 ASSIGNMENT 2 2022SEMESTER 2
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QUESTION 1 [10 marks]
Bonga currently has a portfolio of ordinary shares representing several
different companies. Bonga considers it to be a well-balanced investment
portfolio, but he wants to reduce the overall risk of the portfolio a bit more by
including ordinary shares from Titan Mining Corporation.
The following information on Titan Mining Corporation is available:
For the period 2017 to 2020, the company paid the following dividends per year
respectively: R3,14; R3,55; R3,89; and R3,95. The 2021 dividend is expected to
increase by the average growth rate of the dividends between 2017 and 2020,
and the dividend will increase by 10% per year indefinitely from 2022 onwards.
Bonga requires a return of 15% on his investment portfolio and is not prepared
to pay more than R52,00 per ordinary share of Titan Mining Corporation.
1.1 Calculate the current price of Titan Mining Corporation’s ordinary share. (8
marks)
Growth rate (2017 – 2020):
Using a Financial calculator:
PV = -3.14
FV = 3.95
N=3
Comp I/Y = 7.95%
The average growth rate = 7.95
2021 and 2022 dividends
2021 = 3.95 (1+0.0795) = 4.264025
2022 = 4.264025 (1+0.10) = 4.6904275
Terminal value at the end of 2021:
4.6904275
T (2021) = (0.15−0.10) = 93.80855
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