(50 marks] Question
You are considering an investment in a company (Strongbow Warehousing Ltd.) that provides warehousing
services to the FMCG industry in Gauteng To make an informed decision, you requested the management
of the company to provide you with the necessary financial information. The following information was
provided
The free cash flow for the next 5 years at Strongbow Warehousing Ltd is expected to be as follows:
Years from now
Future value
R3 000 000
R3 000 000
2
R3 500 000
3
R3 500 000
4
R3 500 000
5
The risk-free rate of the long-terms government bonds is 8% after tax
The market risk premium is 6%
The beta factor of Strongbow Warehousing Ltd has been 1.4 for the past 5 years and is also expected
to be a reliable forecast of the future beta of Strongbow Warehousing Ltd.
The terminal value after 5 years will be R10 000 000
There are 50 000 shares in issue
Questions:
1.1) Calculate the value of a share in Strongbow Warehousing Ltd. (10 Marks)
1.2) If you are offered to buy shares in Strongbow Warehousing Ltd at R150.00 a share, will you consider it
good value? (5 Marks)
1.3) Fully explain what is meant with cost of equity and how it is calculated (15 Marks)
1.4) In theory, how can the value of the shares of Strongbow Warehousing Ltd be increased? What
contribution can the logistics department make? (20 marks)​