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Question 1 Star Cement Limited is a leading cement manufacturer in the country. Presently, it holds majority of the industry share in black cement. In the recent years, the company has seen rapid growth in the sale of white cement - its new product into its existing product line. This white cement is considered as very effective for removing salinity in walls. In the company’s board meeting held at the beginning of the year, it has been decided to pay dividend of Rs. 2.50 per share at the year-end. At the end of current year, yearly growth rate of 20% has also been estimated for the next four years followed by a constant growth rate of 15%. Required: 1. Determine present value of the company’s share using 18% required rate of return. (10 Marks) 2. What would be the total return on the stock if the stock price is Rs. 30 and current dividend is Rs. 3 which is expected to grow at 15%. (3 Marks) Question 2 In continuation of the Question 1, assume that the company decides to establish a new production plant to smooth manufacturing process of its white cement. This plant requires an investment of Rs. 12 million. The company estimates Rs. 18M as net income and Rs. 20M as annual cash flows from this investment. Required: 1. Determine the following: a) The time period required to recover the initial investment. (3 Marks) b) Average accounting return (AAR) for the project. (3 Marks) 2. Does the project is feasible for the company based upon the results of parts A & B above. (1 Mark) See More
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