Valuations - U-Phone memo

Q1

a)

R = Rf + B(Rm - Rf)

Market Risk Premium = (Rm - Rf)

Old Market Risk Premium = 4.75% (Given)

New Market Risk Premium = 8.0% (Given)

Rf = 6.50% 1
B = 1.62
Rm = 14.50% (6.5% + 8%)

R = 19.46% (6.5% + 1.62(8)) 2

3

b)

P = D1/(r - g)

Year 0 1 2 3 4
Dividend 11.50 12.02
Terminal value
Cash flows 11.50 12.02

Intrinsic value
P = 80.33 3
D1 = 12.02 (11.5 + 4.5% Growth) 1
r = 19.46% 1
g = 4.50% 1

6
c)

The intrinsic value per share is R80.33 The shares are currently trading at R95.
The shares are thus under-valued. 1

I will would be interested in purchasing the shares. 1

2

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 Valuations - U-Phone memo
Q1
d)

P = D1/(r - g)
20.12 20.13 20.14 20.15
Year 0 1 2 3
Dividend 3.80 3.80 3.90 4.11
Terminal value 73.97
Cash flows 3.80 3.80 3.90 78.08

-3.33 -3.00 -52.70

Terminal value
P = 73.9661 -59.03 1
D1 = 4.44 (4.11+8% Growth) 1
r = 14.00%
g = 8.00%

P/YR 1
I 14.00%
CF 0 0.00
1 3.80 1
2 3.90 1
3 78.08 3

NPV 59.03 1
8

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