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INV3701 Assignment 02 S1 2023 (899224) Detailed Solutions
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Investments: Equity Asset ValuationINV3701
SEMESTER 1 ASSIGNMENT 2
USE FOUR DECIMAL PLACES IN ALL YOUR CALCULATIONS AND ROUND OFF YOUR DECIMAL
ANSWER TO TWO DECIMAL PLACES.
ASSIGNMENT 02 DUE DATE: FRIDAY 14 APRIL
SEMESTER 1: Unique number 899224
Aim: To evaluate your knowledge of some of the fundamental aspects of equity valuation: application and
process, equity return concepts, the dividend discount model and free the cash flow model, residual income
model and price models. Refer to lessons 1 to 6, which include chapters 1, 3 to 5 and, 7 to 10 in the
prescribed book
Answer the following questions and submit your assignment online at https://my.unisa.ac.za
1
, The following assignment contains 20 multiple-choice questions [20 marks]
Questions
1. An analyst is evaluating a mature company whose current earnings are R550 000 and its retention
ratio is 85%. The company has issued 50 000 shares and is expecting to grow at a rate of 5% per year
for the foreseeable future. The equity risk premium of the company is 10.5%, its beta is 0.75 and the
risk-free rate is 3%. The current value of the share is closest to …
a. R29.46
b. R47.73
c. R166.96
Option a correct
DPS (Do) = payout ratio x EPS
= (1-0.85) * (550 000/50 000)
= R1.65
Re (CAPM) = Rf +β (Rm -Rf)
= 3 + 0.75(10.5) = 10.875%
Vo = D1/Re – g
= 1.65(1.05)/ (0.10875 -0. 05)
= 29.4894
2. Which one of the following non-cash charges will most likely result in a decrease in earnings before
interest and taxes (EBIT)?
a. Loss on sale of an asset.
b. Impairment of intangible assets.
c. Income from reversal of restructuring charges.
Option C correct
Income from restructuring charge reversals and other noncash gains should be subtracted from net income.
2
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