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 shares of Alpha Company. You have collected the following data:
Earnings per share last year $6.00
Payout ratio 0.40
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
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.
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