Chen has never invested in shares before. She has come to you as a prospective finance graduate,

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Question:

Chen has never invested in shares before. She has come to you as a prospective finance graduate, for some advice. In your conversations with Chen, you have determined her Required Rate of Return (RRR) to be 5.50%.

a) Determine the value of a share in BBB Ltd. if they paid a dividend of $0.5 this year and the dividend is expected to grow by 2% indefinitely. (2 ) marks

Show formula, variables, calculation and a concluding statement in your response.

b) Determine the value of a share in CCC Ltd. if in the current year they paid a dividend of $0.6 and this is expected to not change into the foreseeable future. (2 marks)

Show formula, variables, calculation and a concluding statement in your response.

c) If the market price for each share in parts a) and b) is $10 per share, should Chen buy either or both shares? Justify your answer. (2 marks)

d) Chen decided to buy 200 000 shares in DDD Ltd., giving her 2% ownership in the company (DDD Ltd. currently has 10 000 000 issued shares). One year later, DDD Ltd. announces a private placement of a further 10 000 000 shares, in order to raise funds for their new venture: Project Rare Earths.

(i) Describe two features of a private placement of shares. (1 mark)

(ii) What is the major disadvantage to Chen of the above private placement? Include in your answer the effect on her ownership. (1 mark)

(iii) Identify one other source of equity funding Chen, as a shareholder, would prefer. Justify your choice. (2 marks)

e) Chen's friend Soutan is a 23-year-old with no debt to his name. He is frustrated by the change in the interest he receives from savings. Under Chen's recommendation, Soutan came to you for investment advice. Explain the recommendations you would make to Soutan by using what you have learnt in MAF101. (2 marks)