Jubail Flower Company is a well-known business established in JUBAIL for the past 20-years. The following table shows their performance for the past 5 years (2017 – 2021). See table below.

The owners of the company would like to sell their shares to the public and want to list their shares in Tadawul. You are the finance manager of this firm to give advice on listing in Tadawul to the owner of the Jubail Flower Company.

	2017	2018	2019	2020	2021
	SAR	SAR	SAR	SAR	SAR
Book value, start of year	62,700,000	66,100,000	69,000,000	73,900,000	76,500,000
Earnings	9,700,000	9,500,000	11,800,000	11,000,000	11,200,000
Dividends	6,300,000	6,600,000	6,900,000	7,400,000	7,700,000
Retained earnings	3,400,000	2,900,000	4,900,000	2,600,000	3,500,000
Book value, end of year	66,100,000	69,000,000	73,900,000	76,500,000	80,000,000

Jubail Flower Company has 400,000 common shares and has the policy is to pay cash dividends equal to 10% of start-of-year book value.

The owner of the company believes that the current book value (as of 2021) of each share is SAR 200 (SAR 80,000,000 / 400,000).

You as a finance Manager advised the owner that the value depended not just on its current book value or earnings but on its future prospects, which were good. You believe that it should be more than SAR 200. The financial projection and forecast for future growth is given below (in SAR) in tow plans:

Pan A - Quick-Growth Scenario

• earnings equal to 15% of start-of-year book value and constant profitability rate
• all earnings are reinvested from 2022 to 2025. In 2026 and later years, two-thirds of earnings are paid out as dividends and one-third reinvested.

 

Plan B - Constant-Growth Scenario

• Earnings equal to 15% of start-of-year book value and constant profitability rate
• Two-thirds of earnings are paid out as dividends in all years.

 

You are the financial manager of this firm and have already prepared the above two Plans A & B. Investors in Jubail retail sector normally require an 11% rate of return on their investment. The return on the book value of equity is 15%.

  

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Book value, start of year Earnings Dividends Retained eamings Book value, end of year 2022 80,000,000 12,000,000 2023 92,000,000 13,800,000 12,000,000 13,800,000 92,000,000 105,800,000 2024 105,800,000 15,900,000 15,900,000 121,700,000 2025 121,700,000 18,300,000 18,300,000 139,900,000 2026 139,900,000 21,000,000 14,000,000 7,000,000 146,900,000 2027 146,900,000 22,000,000 14,700,000 7,400,000 154,300,000 Book value, start of year Earnings Dividends Retained eamings Book value, end of year 2022 80,000,000 12,000,000 2023 92,000,000 13,800,000 12,000,000 13,800,000 92,000,000 105,800,000 2024 105,800,000 15,900,000 15,900,000 121,700,000 2025 121,700,000 18,300,000 18,300,000 139,900,000 2026 139,900,000 21,000,000 14,000,000 7,000,000 146,900,000 2027 146,900,000 22,000,000 14,700,000 7,400,000 154,300,000 Book value, start of year Earnings Dividends Retained eamings Book value, end of year 2022 80,000,000 12,000,000 2023 92,000,000 13,800,000 12,000,000 13,800,000 92,000,000 105,800,000 2024 105,800,000 15,900,000 15,900,000 121,700,000 2025 121,700,000 18,300,000 18,300,000 139,900,000 2026 139,900,000 21,000,000 14,000,000 7,000,000 146,900,000 2027 146,900,000 22,000,000 14,700,000 7,400,000 154,300,000 Book value, start of year Earnings Dividends Retained eamings Book value, end of year 2022 80,000,000 12,000,000 2023 92,000,000 13,800,000 12,000,000 13,800,000 92,000,000 105,800,000 2024 105,800,000 15,900,000 15,900,000 121,700,000 2025 121,700,000 18,300,000 18,300,000 139,900,000 2026 139,900,000 21,000,000 14,000,000 7,000,000 146,900,000 2027 146,900,000 22,000,000 14,700,000 7,400,000 154,300,000 Book value, start of year Earnings Dividends Retained eamings Book value, end of year 2022 80,000,000 12,000,000 2023 92,000,000 13,800,000 12,000,000 13,800,000 92,000,000 105,800,000 2024 105,800,000 15,900,000 15,900,000 121,700,000 2025 121,700,000 18,300,000 18,300,000 139,900,000 2026 139,900,000 21,000,000 14,000,000 7,000,000 146,900,000 2027 146,900,000 22,000,000 14,700,000 7,400,000 154,300,000 Book value, start of year Earnings Dividends Retained eamings Book value, end of year 2022 80,000,000 12,000,000 2023 92,000,000 13,800,000 12,000,000 13,800,000 92,000,000 105,800,000 2024 105,800,000 15,900,000 15,900,000 121,700,000 2025 121,700,000 18,300,000 18,300,000 139,900,000 2026 139,900,000 21,000,000 14,000,000 7,000,000 146,900,000 2027 146,900,000 22,000,000 14,700,000 7,400,000 154,300,000 Book value, start of year Earnings Dividends Retained eamings Book value, end of year 2022 80,000,000 12,000,000 2023 92,000,000 13,800,000 12,000,000 13,800,000 92,000,000 105,800,000 2024 105,800,000 15,900,000 15,900,000 121,700,000 2025 121,700,000 18,300,000 18,300,000 139,900,000 2026 139,900,000 21,000,000 14,000,000 7,000,000 146,900,000 2027 146,900,000 22,000,000 14,700,000 7,400,000 154,300,000 Book value, start of year Earnings Dividends Retained eamings Book value, end of year 2022 80,000,000 12,000,000 2023 92,000,000 13,800,000 12,000,000 13,800,000 92,000,000 105,800,000 2024 105,800,000 15,900,000 15,900,000 121,700,000 2025 121,700,000 18,300,000 18,300,000 139,900,000 2026 139,900,000 21,000,000 14,000,000 7,000,000 146,900,000 2027 146,900,000 22,000,000 14,700,000 7,400,000 154,300,000

Answer rating: 100% (QA)

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