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Management Competency

Autor:   •  January 20, 2017  •  Case Study  •  975 Words (4 Pages)  •  677 Views

Page 1 of 4

Part A.

Net asset in 2015

287,387

Net asset in 2014

175,406

Net income 2015

56,766

ROE(2015)=Net income 2015 / Net asset in 2014

0.3236

Dividend payout ratio = Dividend 2015 / Net income 2015

0.603

ROE after dividend= ROE (2015)* (1- Dividend payout ratio)

0.1285

a)

From the Select Harvest Ltd 2015 Annual Report[1]

Step1:

Net income for 2015, NI2015=56,766

Book value at 2014.6.30, bv2014=175,406

Book value at 2015.6.30, bv2015= 287,387

ROE2015=NI/E2015= 56,766/175,406= 0.3236

(Note: the unit of net income and book value is $1,000)

Step2:

Assume Select Harvest has persistence earnings for seven years, ROE and dividend payout ratio will continue for seven years.

Dividend payout ratio, k, for 2015= Dividend per share/ Earnings per share

= 50/82.9 = 0.603

ROE after dividend=0.32362633*(1-0.603) = 0.1285

Step3:

Assume cost of equity will stay constant

CAPM= Rf+ βj(E(Mt)-Rf)=2.85%+1.29*4.8%= 9.04%

β=1.29[2]

Rf=2.85 % [3]

(E(Mt)-Rf)=4.8%

Step4:

Expected BV based on the firm generating ROE of Select Harvest Ltd for 7 years

bv2015=287,387

bv2016= 287,387*(1+0.1285) = 324,310

bv2017= 324,310*(1+0.1285) = 365,978

bv2018= 365,978*(1+0.1285) = 412,998

bv2019= 412,998*(1+0.1285) = 466,060

bv2020= 466,060*(1+0.1285) = 525,939

bv2021= 525,939*(1+0.1285) = 593,512

(Note: the unit of book value is $1,000)

Step5:

abnormal earning2016= (0.3236-0.0904) * 287,387= 67,020

abnormal earning2017= (0.3236-0.0904) * 324,310= 75,631

abnormal earning2018= (0.3236-0.0904) * 365,978= 85,348

abnormal earning2019= (0.3236-0.0904) * 412,998= 96,314

abnormal earning2020= (0.3236-0.0904) * 466,060= 108,688

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