Would expect adviser to make a buy

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Question 1) You are told by your investment advisor that Laduma Co. is expected to earn $5 per share next year, $6 per share the following year and that thereafter earnings are expected to grow by 8 percent per year. The dividend payout ratio is 60 percent and the required rate of return on Laduma shares is 15 percent. If the current share price is $40, would you expect your adviser to make a buy, hold or sell recommendation? If transaction costs are $2,50 per share, would you follow his advice?

Question 2) You are interested in Speculative Holdings which is currently trading at a market price of $4.2 per share. You expect it to achieve earnings next year of $3,420,000 and project a dividend next year of $0.137 per share. The firm has 10 million shares in issue and you estimate that you would require a return of 12% on this investment. What position would you take on Speculative Holdings?

Reference no: EM132557961

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