Question

2.Greystoke Ltd is a very large UK company, listed on the Alternative Investment Market (AIM). With a growing reputation for delivering top quality products, on time and on budget the future looks bright for Greystoke Ltd.

Research into the 2016/17 company accounts and extensive discussions with market analysts have given the following information on Greystoke Ltd:

i) ROE = 15%

ii) Beta = 1.4

iii) EPS = £3.50

iv) They plan to maintain their traditional plowback ratio of 2/3

Greystoke Ltd have just paid their annual dividend and the market consensus is that the 2017/18 market return should be 20% with a current T-bill offering 4%.

2.1 Using the above information find the price at which Greystoke Ltd stock should sell.

2.2 Calculate both the leading and trailing price earnings ratios, and explain why

you would want to know both.(5%)

2.3 Suppose your research convinces you Greystoke Ltd will announce that it will reduce its plowback ratio to 1/3 with immediate effect. Calculate the intrinsic value of the stock under this new condition.(10%)

2.4 Would investors in a passive low risk fund have the same concerns about performance indicators than an investor in an active high-risk fund? Discuss the relevance of performance measures for these types of professionally managed funds. Give examples of other performance indicators you have come across and refer to academic articles you have read that would help to explain your arguments.(13.3 %)

Answer 1

solution 2.1
growth rate g= ROE x b
      = 15% x 2 /3
      = 10%
Required return K = Rf+ (rm - Rf) x beta
    = 0.04 + (0.20-0.04) x 1.40
    = 26.40%

Do = 3.50 x2/3
   = 2.3333

Price = Do x (1+g)/ K-g)
      = 2.3333 x (1+0.10)/ (0.2640-0.10)
      = 2.5667 / 0.1640
      = $15.65

therefore, the price of the stock would be $15.65.