Calculate the intrinsic value of the firm by

using a residual income model, assuming that after three years continuing

residual income falls to zero.

Use the information

below to answer question 39 and 40.

An equity analyst is evaluating

a potential investment in a firm and has gathered the following information as

of December 2024.

·       Current price equals R84.

·       Cost of equity equals R14.20.

·      

The firm is expected to exhibit a ROE of 20% over

the next three years.

·       The book value per share is currently R100.

·       The firm has a dividend payout ratio of 30%.

·      

Forecasted earnings in years one to three are

equal to ROE multiplied by beginning book value.

·      

Assuming that after three

years, continuing residual income falls to zero.

The terminal value, based on a perpetuity of year

three’s residual income is close to:

Use the information

below to answer question 38.

Olive, an equity analyst, observes that 2024 was an

exceptionally profitable year for Evergreen Ltd. She also notes that the

company typically has a low dividend payout ratio, as most of its earnings are

reinvested to promote growth. Furthermore, the income statement contains very

few nonrecurring items. Upon reviewing Olive’s preliminary report, her manager,

Sam, concurs with her analysis of the financial statements but reminds her that

Evergreen Ltd’s long-term debt is currently trading at 95% of its book value.

Assume Olive and Sam are correct with their

conclusions regarding the company's financial statements, which of the following

levels would

An INV3701 student is interested

in obtaining the market’s assessment of the implied growth rate in residual

income and notes that the book value per share for a firm at the beginning of

2025 was R4.25, and the current market price is R70. She forecast the return on

equity (ROE) for 2025 to be 11.84%

Use the information

below to answer question 35 and 36.

Thabiso is an equity analyst

responsible for producing financial reports to use as tools to attract new

clients. He is analysing Kgosi Textiles Ltd, where, along with a dividend

discount model approach, he would like to measure the contribution that the

managers of Kgosi have made to the company’s apparent ongoing success.

He considers using NOPAT and EVA

to assess management performance. He believes that increasing invested capital

to pursue projects with positive net present values will lead to growth in both

NOPAT and EVA.

However, Thabiso decides

to use the residual income model instead. He provides the following

justification for his choice:

•  

  The calculation of residual income depends primarily on readily

  available accounting data.

• The residual income model can be used even when cash flow is difficult

  to forecast.

• The residual income model does not depend on dividend payments or on

  positive free cash flows in the near future.

• The residual income model depends on the validity of the clean surplus

  relation.

Is Thabiso correct

in

believing that increasing invested capital to pursue projects with positive net

present values will lead to higher NOPAT and EVA?

Are Thabiso’s

justifications for using the residual income model, 

Use the following information to answer question 31 to 33.

An analyst covering Limpopo Ltd has compiled the following data (in hundreds of millions of rands) for the financial year ended 31 December 2024, in preparing for further analysis. This analysis will be included in a report she has been asked to produce. Limpopo Ltd is financed through a combination of preference shares, bonds, and equity.

Preference share dividends                                                      R50

Net income available to common shareholders                      R320

Increase in investment in working capital                                R60

Increase in investment in fixed capital                                     R120

Net borrowing                                                                          R90

Income resulting from reversal of restructuring charges         R25

Depreciation                                                                             R140

Interest expense                                                                       R100

Tax rate                                                                                     30%

Long-term growth rate of FCFF                                               3%

Long-term growth rate of FCFE                                               4%

The total value of Limpopo

Ltd, using a single stage FCFF model, is closest to:

The sustainable growth rate is the

rate of dividends and earnings growth that can be sustained for a given return

on equity, assuming that:

The current free cash flow to the firm (FCFF) for

Limpopo Ltd is closest to:

Use the following information

to answer question 31 to 33.

An analyst covering

Limpopo Ltd has compiled the following data (in hundreds of millions of

rands) for the financial year ended 31 December 2024, in preparing for further

analysis. This analysis will be included in a report she has been asked to

produce. Limpopo Ltd is financed through a combination of preference

shares, bonds, and equity.

Preference

share dividends                                                      R50

Net income

available to common shareholders                      R320

Increase in

investment in working capital                                R60

Increase in

investment in fixed capital                                     R120

Net borrowing                                                                          R90

Income

resulting from reversal of restructuring charges         R25

Depreciation                                                                             R140

Interest

expense                                                                       R100

Tax rate                                                                                     30%

Long-term growth rate of FCFF                                               3%

Long-term growth rate of FCFE                                               4%

Calculate the weighted average cost of capital (WACC) of Limpopo Ltd.