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Hi,
Could you please help me:
1, Jam Co has inventory 1m, cash 0.5m and current liabilties 2.5, sales 50m and current ratio 2.4
What is recieveables days? Answer is 33 Days.?I tried to work backwards to see if I have in total 1.5 Assets then I need something divide by liabilties to get 2.4. I am confused?
2, KK plc market value $3.20, dividend cover 3.0, dividend yield is 4% what is PE ratio? Answer is 8.33. Could you advise me how, and there are so many ways to do PE ratio what is best I need to learn for PE Ratio. I know then formula Market share price / EPS but means nothing if I cannot calculate it 🙁
Thanks alot in advance.
Question 1:
Current assets must be 2.4 times the current liabilities, which is 2.4 x 2.5 = 6M
You know the inventory and cash, so the balance must be receivables.
Then you can calculate the receivables days.Question 2:
There is only one way for PE, which is what you write: MV/EPS
However you are also supposed to know that divi yield is Divi/MV, and that divi cover is EPS/Divi.
If Divi yield is 4%, the dividend must be 4% x $3.20 = $0.128.
Since divi cover is 3, the EPS must be 3 x $0.128 = $0.384So now the PE ratio is easy 🙂
Ahhh perfect so 8.33
Is from 3.20 / 0.384
I am really bad at PE ratio I have done so many! Never know how to do it even though I know the formulas.
Hi Sir,
Could you explain for me this question?
Beta plc is about to pay a dividend of $0.4/share. Dividends are growing at the rate of 5% p.a. The shareholders’ required rate of return is 20% p.a. The rate of corporation tax is 25%. What is current MV/share?I used Dividend growth model with D1 = 0.4 x (1+0.05), Ke = 20%, g = 5%. The result is $2.8. However, key is $3.2.
Could you help me where I am wrong and why?
Thanks in advance.
The dividend growth model give the ex div value.
Since the dividend is about to be paid, we need the cum div value. The cum div value is the ex div value plus the dividend about to be paid.
2.80 + 0.40 = $3.20
Hi Sir,
Does this mean EVERYTIME it says “ABOUT” means it is Ex div and needs to be changed to Cumdi……….and just been paid you would need ex div always?
Thanks in advance.
Just been paid means ex div
About to be paid means cum divIf not told then we always assume ex div.
The formula gives the ex div value.
Could you please help me with these MCQ?
Q1: The share price of CP plc. is $4/share. They announce a 1 for 5 rights issue at $3.10 per share. What is theoretical ex-right (per existing share)?
My work is: ((5x$4)+(1x$3.10))/ (5+1) =$3.85.
Answer is $0.15.Q2: The share price of CP plc. is $4/share. They announce a 1 for 5 rights issue at $3.10 per share. what percentage of the rights offered to a shareholder does the shareholder need to take up so as to have no net cash flow resulting from the issue?
Q3: RI Co has in issue 6% redeemable bonds, quoted as 120% ex interest. The statement is consistent with these information is:
Interest yield is 5% and redemption yield is 4%.
Could you explain?Q4: A project requires an investment of $24,000 at time 0 and generates an inflow of $5000 per year for 8 years (with the first inflow occurring in one year time). What is internal rate of return?
Q5: Issue 8% irredeemable bonds quoted at 86% ex interest. Rate of corporate tax is 25%. Ignore personal tax. Cost of debt =?
Question 1:
The question asked for the value of the rights (not the TERP).
So the value of the rights is 3.85 – 3.10 = 0.75 for each new share, or 0.75/5 = 0.15 per existing share.
The lecture on this will help you.
Question 2:
If there is no net cash flow, then the total value of the shares after the rights issue must be equal to the total value of the shares before the rights issue.
So, if an investor had (say ) 1,000 shares (any number will do – the final answer will be the same) then the total value before the rights issue was 1000 x $4 = $4000.
The TERP is $3.85. So for the total value to remain at $4,000 they must have 4000/3.85 = 1039 shares after the rights issue. So they must have taken up 39 shares.
They were entitled to 1/5 x 1000 = 200.
So they took up 39/200 = 19.5%Question 3:
The interest yield is 6/120 = 5%.
You cannot be asked to calculate the redemption yield, but you are expected to know that it takes account of both the interest and the gain or loss on repayment. Since here there is a loss on repayment (current value 120, repayment 100), the redemption yield must be lower that the interest yield. Only one of the choices satisfies this.Question 4:
Since it is an annuity, 5,000 x 8 year annuity d.f. = 24,000
Therefore the 8 year annuity d.f. = 24,000/5,000 = 4.800
If you look in the annuity tables along the 8 year row, the interest rate giving a df of 4.800 is 13%
Question 5:
Cost of debt = (8 x 0.75)/86 = 6.98%
However, are you sure the question asked for the cost of debt? If it asked for the return to the investor, then this is 8/86 = 9.30% (tax is irrelevant when calculating the return to investors).
Again, the free lectures on this will help you.
Wooaaa !!! Mr. John Moffat, just only “Thank you” may be not enough. It is so kind of you to answer promptly a lot of questions in detailed. Thank you soooooo muchhh. I am studying those answers.
Such many questions in MCQ are difficult that I cannot find the way for answers.Mr. John Moffat could you please explain why the answer is $2.56?
It’s MCQ. A company has just paid a dividend of $0.23 per share. Shareholders are expecting the dividend to remain at $0.23 per share net year but to increase at an average rate of 3% per annum thereafter.
Shareholder required rate of return is 12%, and the rate of corporation tax is 25%.What will be the current market value per share?
I suggest that MV reflects the expected dividends. So I use growth model to receive MV at the end of year 1. And then discount 0.23 for 1 year and then put them togerther…
Thanks in advance!
Hey Tatiana,
First thing before you do dividend growth model is work out the growth.
so DO/DN to the power of 1/n – 1
So in this case the dividend now is same as dividend n number of years ago.
So 0.23/0.23 to the power of 1 – 1 = 0
So growth is 0
hence what you do in Dividend growth model is:
PO = do 1+g / Ke – g
So 0.23 (No growth) divide by 0.12 – 0.03 = 2.555 so 2.56
This will give you the answer 🙂
Hope that helps
Thanks, vipulv!
But it seems to me that g should be the same for upper and lower part of the formula. But you use different values: 0 – for the top, and 0.03 for the bottom.
And also it’s told that shareholders are expecting 3% growth. So why it should be zero?Well, but your answer is correct =)
The 3% growth could be in the future hence you put it at the bottom. from your cost of equity you minus it.
Do(1+g) on the top of the formula is the dividend in 1 years time. Usually it is the current divided grown for 1 year (which is why the (1+g)).
However, in this question you are told that the dividend in 1 years time will be 0.23. So this replaces Do(1+g).
It does not affect the bottom of the formula because from next year onwards there will be growth at 3%.
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