[Romerands]

Interco Plc has a past and projected ROE of 11% per annum. The company has existing equity of £80 million. Management has a policy of paying out 60% of the earnings as a dividend each year. This policy is expected to continue into the future. Investors require a 10% per annum return on Interco Plc shares.
a) What is the current share price for Interco Plc? There are 20 million shares in issue.


Plastico Plc is an all equity-funded business that has just ended its financial year and paid its announced dividend of 180p. The company has a book value of assets totaling £26 million and there are one million shares in issue. The company’s shareholders require a 10% per annum return on their equity investment.
a) What is the current share price for Plastico Plc if the company is expected to continue to pay out 60% of its earnings as a dividend?
b) What is the present value of growth opportunities for Plastico Plc.
c) Assume you can take control of the company by buying 50% of the shares at the current price. What capital gain would you earn in the short-term if you immediately announced that you intended to reduce the payout over the next three calendar years to 0.15; 0.3 and 0.45 respectively before reverting to the 60% pay out policy? Assume the market accepts your ability to generate the expected performance.
NOTE: The capital gain mentioned here relates to the short-term price effect from the announcement.