a) The price per share of the Dell’s Deli Corporation is less than its book value. Does this difference indicate that the firm’s present shareholders have lost money in the past? Does it indicate that they are likely to lose money in the future? Does it indicate that Dell’s Deli should not undertake any further capital investment? Explain your answers.
b) Price earnings ratios for individual companies vary over time and among firms. Discuss some of the possible reasons for this variability.
c) Sure Tool Company is expected to pay a dividend of Ksh.2 in the upcoming year. The risk free rate of return is 4% and the expected return of the market portfolio is 14%. Analysts expect the price of Sure Tool shares to be Shs.22 a year from now. The beta of Sure Tool Company’s stock is 1.25. Required:
i) The market’s required rate of return on Sure Tool’s stock.
ii) What is the intrinsic value of sure Tool’s stock today?
iii) If the intrinsic value is sh.21 today, what must be the growth rate?