FACULTY OF COMMERCE AND LAW

DEPARTMENT OF BANKING AND FINANCE

JANAURY 2020 ASSIGNMENT
BUSINESS FINANCE 1 BBFH202
INTAKE 33, PART 2, SEMESTER 1

ASSIGNMENT I

1. Zimnat Life pays no cash dividends currently and is not expected to pay for the next 5
years. Its latest EPS was $10, all of which was reinvested in the company. The firm’s
expected ROE for the next 5 years is 20% per year, and during this time, it is expected
to continue to reinvest all of its earnings. Starting 6 years from now the firm’s ROE
on new investment is expected to fall to 15% and the company is expected to start
paying out 40% of its earning in cash dividends, which it will continue to do forever
after. Zimnat’s market capitalisation rate is 15% per year.
(a) Estimate the intrinsic value per share of the firm. [15]
(b) Assuming its current market price is equal to its intrinsic value, what do you expect to
happen to its price over the next year and the year after? [5]
(c) What effect would it have on your estimate of the intrinsic value if you expected
Zimnat to pay out only 20% of earnings starting in year 6? [5]

2. Assume a 35-year old investor wants to retire in 25 years at the age of 60. She
expects to earn 12.5% on her investments prior to her retirement and 10% thereafter.
How much must she deposit at the end of each year for the next 25 years in order to
be able to withdraw $25 000 per year at the beginning of each year for 30 years?
[25]