Question Two Answer all parts Show all your workings (a) Southern Manufacturing (SM) recently reported the...

Transcribed Image Text:

Question Two Answer all parts Show all your workings (a) Southern Manufacturing (SM) recently reported the following year-end 2021 results (in millions): Net Income Dividends 14,000 6,125 Book Value of Equity 93,000 Shares Outstanding 5,600 The following information for 2021 and each of the last three years is also available (in millions): Net Income 2018 2019 2020 2021 11,614 12,717 12,844 Dividends Buybacks Net Long Term Debt Issued 4,875 5,725 6,035 1,979 2,056 2,355 185 1,560 55 -156 25 SM is expecting its current rate of growth to continue for the next seven years before declining to stable growth of 3.5% per annum. SM's beta is expected to be stable at 1.20 throughout. The risk free rate and the market risk premium are expected to be 2.0% and 5.0%, respectively. (i) Calculate SM's modified payout ratio. (5 marks) (ii) Using your answer to part (i), above, estimate SM's share price using the dividend discount method. State any assumptions. (20 marks) Question Two Answer all parts Show all your workings (a) Southern Manufacturing (SM) recently reported the following year-end 2021 results (in millions): Net Income Dividends 14,000 6,125 Book Value of Equity 93,000 Shares Outstanding 5,600 The following information for 2021 and each of the last three years is also available (in millions): Net Income 2018 2019 2020 2021 11,614 12,717 12,844 Dividends Buybacks Net Long Term Debt Issued 4,875 5,725 6,035 1,979 2,056 2,355 185 1,560 55 -156 25 SM is expecting its current rate of growth to continue for the next seven years before declining to stable growth of 3.5% per annum. SM's beta is expected to be stable at 1.20 throughout. The risk free rate and the market risk premium are expected to be 2.0% and 5.0%, respectively. (i) Calculate SM's modified payout ratio. (5 marks) (ii) Using your answer to part (i), above, estimate SM's share price using the dividend discount method. State any assumptions. (20 marks)