Lecture 4

Question 1

Explain how each of the following factors, taken independently, would affect your valuation,assuming all other factors remain constant;

• Interest rates generally rise causing investors to require a higher rate of return on shares in general.

Answer 1

• higher prequels rate of return (Discount Rate)
• lower PV or future dividends
• Lower share value

Question 2

Explain how each of the following factors, taken independently, would affect your valuation,assuming all other factors remain constant;

• Competition in the marketplace impacts adversely on Roller resulting in an anticipated reduction in future growth

Answer 2

• Lower future dividends
• Lower PV of future Dividends
• Lower Share Value

Question 3

Explain how each of the following factors, taken independently, would affect your valuation,assuming all other factors remain constant;

• Investors in general re-value upwards their assessment of Roller’s overall risk because of he company’s growing dependence on overseas markets.

Answer 3

• Higher required rate of return (Discount Rate)
• Lower PV of future dividends
• Lower Share Value

Question 4

Discuss the factors which make the valuation of ordinary shares more complicated than the valuation of bonds (Debentures) and preference shares.

Answer 4

• Forecasting future dividends more difficult
• RISK: higher risk
  Time Span to infinity