FIN3701 ASSIGNMENT 2
SEMESTER 1 2024
(505104) - DUE 24 APRIL
2024
Questions with Well Outlined Answers
[DATE]
MUSYOKAH11@GMAIL.COM
[Company address]
, FIN3701 Assignment 2 Semester 1 2024 (505104) - DUE 24
April 2024
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.
REQUIRED:
1.1 Calculate the current price of Titan Mining Corporation’s ordinary share. (8
marks)
1.2 Should Bonga purchase Titan Mining Corporation shares to include in his
investment portfolio? Provide reasons for your answer. (2 marks)
1.1 Calculating the Current Price of Titan Mining Corporation's Share (8 marks)
Step 1: Find the Average Dividend Growth Rate (2017-2020)
Average Growth Rate = [(Latest Dividend - First Dividend) / (Number of Years - 1)]
x 100%
Average Growth Rate = [(R3.95 - R3.14) / (4 - 1)] x 100% = 26.1%
Step 2: Estimate the 2021 Dividend
2021 Dividend = 2020 Dividend + (Average Growth Rate * 2020 Dividend)
2021 Dividend = R3.95 + (26.1% * R3.95) = R4.98
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