Maluba is an International Holding Company based in Zimbabwe. During the past year it paid dividends amounting
Question:
Maluba is an International Holding Company based in Zimbabwe. During the past year it paid dividends amounting to $0.95 per share. The company has just announced to its global shareholders that it expects to grow its dividends by 3% over the next 7 years and by 7% thereafter indefinitely. The market equity rate of return is 17%, the risk-free rate is 4% and firm’s beta is 1.2
a. Describe the meaning of cost of equity and calculate Maluba’s cost of equity.
b. Using the dividend discount model, estimate how much you would be willing to pay for Maluba’s shares.
c. Discuss the Weakness of Gordon Growth Model.
d. Discuss how you would go about the calculation if you were required to use the Earning-based Valuation instead.
e. You are considering investing in either Maluba or one of its Peers. The table below shows the Price to Earnings (P/E) and Price to Book (P/B) ratios of four of Maluba’s global peers. Show how you will use these ratios to carry out a comparison of Maluba and its peers.
Company | P/E | P/B | Comparable | P/E | P/B |
Maluba | 15 | 2.1 | Jingju | 13 | 2.2 |
St Andrews | 7 | 2.5 | |||
AbdulJafar | 12 | 3.5 | |||
Mountain | 14.5 | 5 | |||
Average |
Expert Answer:
a The cost of equity is the required rate of return of a stock It is the return that shareholders expect to receive for holding a particular stock The ... View the full answer
