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INV3701 Assignment 02 ECP 2021
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- University Of South Africa (Unisa)
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INV3701SEMESTER 1 ASSIGNMENT 2 ECP STUDENTS
USE FOUR DECIMAL PLACES IN ALL YOUR CALCULATIONS AND ROUND OFF YOUR DECIMAL ANSWER
TO TWO DECIMAL PLACES.
ASSIGNMENT 02 DUE DATE: 8 JUNE 2021
SEMESTER 1: Unique number 673658
SEMESTER 2: Unique number 630200
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 in the study guide, which include chapters 1, 2, 4, 5 and 7-10 in the prescribed
book.
Answer the following questions and submit your assignment online at https://my.unisa.ac.za
The following assignment contains 20 multiple-choice questions [20 marks]
Questions
1. Which one of the following statements is most correct regarding various aspects of equity valuation?
1. The value of a share should increase when the required rate of return increases.
2. When calculating the justified P/E based on a constant growth model, the trailing P/E should be
greater than the forward P/E.
3. A free cash flow approach might be preferable when the company’s cash flows differ substantially
from dividends or when the investor takes a minority perspective.
Option 2 correct
When calculating the justified P/E, based on a constant growth model, the trailing P/E should be greater
than the forward P/E.
2. Which one of the following non-cash charges will most likely result in an increase in earnings before
interest and taxes (EBIT)?
1. Gain on sale of an asset.
2. Impairment of intangible assets.
3. Income from reversal of restructuring charges.
Option 1 correct
, Income from restructuring charge reversals and other noncash gains should be subtracted from net income.
3. Which one of the following statements is most correct?
1. Residual income is suitable for a firm that has positive free cash flow for the foreseeable future.
2. The dividend discount model is suitable for a firm that has the perspective of a minority shareholders
3. Free cash flow models are suitable for firms that have a dividend payment history or have a dividend
payment history that is clearly and appropriately related to earnings.
Option 2 correct
The dividend discount model is suitable for a firm that has the perspective of a minority shareholder.
4. Mokanatla Diamond (MD) shares are currently selling at R300 and MD’s recent earnings are R12 per share.
Its dividend payout ratio is 25%. The risk-free rate is 5.4%, the estimated beta 0.8 and the return on the
market index is 10%. Determine the constant dividend growth rate that MD requires to justify the market
price.
1. 5.22%
2. 7.60%
3. 8.00%
Using the DDM
Po = D1 / r-g
300 = 3(1 +g)/0.0908 - g
Solving for g gives 8%
Re (CAPM) = 5.4 + 0.8(10 -5.4)
= 9.08%
Do = 12 x 0.25 = 3
Use the following information to answer questions 5 and 6.
Masedi Morobane want to value Merc Limited using a single-stage free cash flow to the firm (FCFF)
approach. Morobane gathered the following regarding Merc. The total assets of Merc are financed with
four times as much equity capital as of debt capital.
Shares outstanding R500 400
Market value of debt R700 040
Most recent FCFF R394 220
Beta 0.6
Return on the market index 8%
Risk-free rate 3%
2
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