Reference no: EM133375052

Question 1 Company XYZ's current return on equity (ROE) is 14%. It pays out one-half of earnings as cash dividends (payout ratio = 0.5). Current book value per share is R50. Book value per share will grow as XYZ reinvests earnings. Assume that the ROE and payout ratio stay con- stant for the next four years. After that, competition forces ROE down to 11.5% and the pay- out ratio increases to 0.8. The cost of capital is 11.5%.

• What are XYZ's EPS and dividends next year? How will EPS and dividends grow in years 2, 3, 4, 5,and subsequent years?
• What is XYZ's stock worth per share? How does that value depend on the payout ratio and growth rate after year 4?

Question 2

Kagiso Dimba, aged 40, is the operations director at his family's company, Dimba Holdings (Pty) Ltd. (DH). Kagiso earns a salary ZAR 1.2 million per year before taxes. Amahle Dimba, Kagiso's spouse, aged 38, sits at home to take care of the couple's newborn twins. Amahle re- cently inherited ZAR 13.5 million (after wealth-transfer taxes) in cash from her father's es- tate. In addition, the Dimbas have accumulated the following assets: ZAR 75,000 in cash, ZAR 2.4 million in stocks and bonds, and ZAR 3.3 million in the DH stock. The value of the couple's holdings in the DH stock has appreciated substantially as a result of the company's growth in sales and profits during the last ten years. Kagiso is confident that the company

and its stock will continue to perform well.

The Dimbasnow need ZAR 450,000 for a down payment on the purchaseof a house and plan to make a ZAR 300,000 non-tax-deductible donation to a charity in memory of Amahle's fa- ther. The Dimba's living expenses are ZAR 1.11 million per year. After-tax increments on Kagiso's salary will offset any future increasesin their living expenses.

During their recent discussion with their financial advisor, Dineo Lekota, the Dimbas ex- pressed concern aboutachieving their educational goals for their children and their own re- tirement goals. The Dimbas told Dineo

• They want to have sufficient funds to retire in 18 years when their children begin their future years of college education.
• They have been unhappy with the portfolio volatility that they have experienced in re- cent years and they do not want to experience a loss greater than 12% in any one year.
• They do not want to invest in alcohol and tobacco stocks.
• They will not have any additional children.