Question 2
ICAN
•
2023
•
STRATEGIC FINANCIAL MANAGEMENT
•
mixed
Case Stimulus
You are a Financial Analyst at Tayo Research Group (TRG). You begin valuing Aba Hotels Plc (AHP), a thinly and infrequently traded stock currently selling at 217 kobo, cum 2021 dividend.
For estimating AHP’s required return on equity, TRG uses the capital asset pricing model (CAPM) approach, but you think its equity beta of 1.20 is not reliable because of the stock’s extremely thin trading volume. You have therefore obtained the beta and other pertinent data for Eko Hotel Plc (EHP) – (See Table 1), a midsized company in the same industry with high liquidity trading on the Nigerian Stock Exchange.
Table 1: Valuation Data for EHP
Asset beta 0.763
Debt beta 0.150
Debt ratio (D/D+E) 0.60
Effective tax rate 30%
Summarised financial data for AHP is shown below:
Statement of profit or loss account
2019 2020 2021*
Sales 305,500 357,600 409,200
Taxable income 40,500 49,000 56,700
Taxation (14,175) (17,150) (19,845)
26,325 31,850 36,855
Dividend (9,340) (10,228) (11,200)
Retails earnings 16,985 21,622 25,655
Statement of Financial Position (₦’000)
2021*
Non-current assets 216,800
Current assets 158,000
Current liabilities (104,800)
270,000
Ordinary Shares (50 kobo par value) 80,000
Reserves 130,000
15% bond 2026(₦100 par value) 60,000
270,000
(*2021 figures are unaudited)
Other relevant information
(i) It has been estimated that the debt/equity ratio of AHP is 0.16 and beta of its debt is 0.2
(ii) The risk free rate is 12% and the market risk premium is 5%.
(iii) AHP has effective tax rate of 35%.
(iv) As a result of recent capital investment, stock market analysts expect post-tax earnings and dividends to increase by 25% for two years and then to revert to the company’s existing growth rates.
Requirements
(
a
)
Stock market analysts sometimes use fundamental analysis and sometimes technical analysis to forecast future share prices. What are fundamental analysis and technical analysis?
(
b
)
Using the dividend valuation model, estimate what a fundamental analyst might consider to be the intrinsic (or realistic) value of the company’s shares. Comment upon the significance of your estimate for the fundamental analyst.
(
c
)
Explain whether your answer to (b) above is consistent with the semi-strong and strong forms of the efficient markets hypothesis (EMH), and comment upon whether financial analysts serve any useful purpose in an efficient market.
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About This Question
This is
Ican
2023
Strategic Financial Management
Question 2.
It is one of the
mixed
questions from the
2023
Ican
Strategic Financial Management
examination.