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Estimate the price of an equity share of this company

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Reference no: EM132942835

Problem - 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 54.00

Payout ratio 0.40

Return on equity 0.25

Cost of equity capital 0.20

The company plans to increase the payout ratio to 50% after 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.

Reference no: EM132942835

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