Question

SHARE VALUATION

QUESTION 8

Tobias Limited has issued an unlimited number of non-redeemable preference shares

with a par value of R100 each at a 4 percent (4%) discount. The preference dividend is

15 percent (15%) per year.

Management expects that the earnings per ordinary share will show no growth over the

next two years where-after it will grow at 6 percent (6%) infinitely. The most recent

dividend per share is R2,00.

The required rate of return of Tobias Limited is 20 percent (20%).

Required:

Calculate the value of the ordinary shares and preference shares of Tobias Limited.

(Show all necessary calculations).

Answer 1

1. Value of Preference Shares = Dividend / Rate = 15/(20%) = 75

2. Value of Ordinary Shares = 1357.14

Particular	Year 0 (Present Value)	Year 1	Year 2	Year 3	Discounting Factor @ 20%
Dividend	166.67	200.00			0.8333
Dividend	138.89		200.00		0.6944
Value	1051.59		1,514.29	212.00	0.6944
Total	1357.14

Value of Ordinary shares at the end of year 2 with growth rate (g) of 6% and cost of equity (ke) as 20%Dividend for year 1 and year 2 is discounted to its present value.

= D1/(Ke-g) = (200*1.06)/(20%-6%) = 1514.29

Value of Ordinary at the end of year 2 is discounted to its present value.