Question

2.1 Stingray Holdings Ltd has a growing reputation on the London Stock Market. Research into the 2014/15 company accounts and extensive discussions with market analysts about Stingray Holdings has generated the following information about the company:

i) ROE = 15%

ii) Beta = 1.2

iii) This year’s EPS = £3.50

iv) Stingray Holdings board plan to maintain their traditional plowback ratio of 2/3 Stingray Holdings Ltd have just paid their annual dividend and the market consensus is that the 2015/16 market return should be 24% with a current Tbill offering 5%.

Calculate the selling price of Stingray Holdings Ltd stock using the above information. (13 %)

2.2 Pure Coffee plc has 20 million ordinary shares in issue. Each share has a par value of £1 and the company recently paid an ordinary dividend amounting to £8 million in total. Ordinary shareholders have a required return of 8%.

Based on this information, provide an estimate of the market price per ordinary share in Pure Coffee plc. Briefly describe at least two assumptions underlying your answer. (10 %)

2.3 You have seen the following statement in a guide to international investing:

‘When considering an international investment it is important to take into account the market size, trading volume and concentration of the underlying stock market.’

Do you agree or disagree with this statement? Note: Your answer should discuss reasons for your opinion with reference to an ideal market structure and should be supported by examples.

Answer 1

2.1) Let us first find required return

Ke = Rf+b(Rm-Rf)

=5%+1.2(24%-5%)

=5%+1.2(19%)

=5%+22.8%

=27.8%

Now lets find growth rate

G = ROE*Retention ratio

=15% * 66.67%

=10%

Dividend for the year = 3.5*33.33% = 1.167

Now Price of stock = D1/Ke +g

=(1.167)(1.1)/27.8%-10%

=1.2832/17.8%

=7.209

2.2) market price per share = Dividend/Ke

=8/8%

=100

Assumtions:

1) company will contine to pay dividend for forseable future

2) Amount of dividend will remain same.( ie there will be no growth in payment of dividend)

2.3) Agree

It is very important to check the market size, trading volume and concentration of the underlying stock market as it provide insight of how market works