What the terminal value based on a perpetuity of year

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Reference no: EM132944622

Nomzamo Mabasa, an equity analyst, is considering an investment in Mzansiwood Production Company that specialises in producing South African films. Mabasa obtains the following information as of December 2020.

Current price equals R84.
Cost of equity equals R14.20.
The firm is expected to exhibit a ROE of 20% over the next three years.
The book value per share of Mzansiwood Limited is currently R100.
Mzansiwood has a dividend payout ratio of 30%.
Forecasted earnings in years one to three are equal to ROE multiplied by beginning book value.
Assuming that after three years, continuing residual income falls to zero.

Problem 1: The terminal value based on a perpetuity of year three's residual income is closest to:

A. R7.52
B. R6.60
C. R53.08

Reference no: EM132944622

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