Company ZZ expects total earnings of R120 000 000 in Year 1. It is the company's policy to reinvest 30% of its earnings into the business. The company will continue maintaining a 7% growth rate per year in earnings and dividends for the foreseeable future. The required rate of return for Company ZZ is 15%. Company ZZ has 8 000 000 shares in issue and the shares are currently trading at R180 per share.

Note: show all calculations and round off your final answers to 2 decimal places.

4.1 Calculate the forward price-earnings (P/E) ratio. (1)

4.2 If the average long-term P/E ratio for the industry in which Company ZZ operates is 25, would you consider Company ZZ's shares to be expensive or cheap? (1)

4.3 Calculate the total value of Company ZZ (firm value) using the constant growth dividend discount model. (2)

4.4 Is Company ZZ's share price undervalued, overvalued or fairly valued? Support your answer. (2)

4.5 Calculate Company ZZ's present value of growth opportunities. (2)

Answer rating: 100% (QA)

41 Calculate the forward priceearnings PE ratio The forward PE ratio can be calculated using the formula textForward PE ratio fracCurrent Share PriceE... View the full answer