1. Kalvin SA pays dividends that are expected to grow at 7 per cent each year. These will stop in year 5, at which point the company will pay out all its earnings as dividends. Next year’s dividend is €10 and its EPS at the time will be €15. If the appropriate discount rate on Kalvin shares is 9 per cent, what is its share price today? (20 marks)
2. If Kalvin SA were to distribute all its earnings, it could maintain a level dividend stream of €15 per share. How much is the market actually paying per share for growth opportunities? (20 marks)
3. A 6-year government bond makes annual coupon payments of 4 per cent and offers a yield of 8 per cent annually compounded. Suppose that one year later the bond still yields 8 per cent. What return has the bondholder earned over the 12-month period? Now suppose that the bond yields 6 per cent at the end of the year. What return would the bondholder earn in this case? The face value of the bond is £1,000. (20 marks)
4. How would you value a firm that pays no dividends? Explain, using a quantitative example to illustrate your answer. (40 marks)