Siya is considering buying some shares in Big Company. She evaluates the equity risk premium for this company to be 3%and expects that the next dividend, payable 3 months from now, will be R24 per share. She thinks that the dividends will grow at 5% per annum after that. The risk-free rate of interest is 9% compounded annually.

(i) Calculate the value Siya puts on a Big Company share.

Big Company shares are currently trading at R350 per share.

(ii) State, giving a reason, whether Siya should buy this share based on the value calculated in (i).

(iii) Explain why there might be a difference in the underlying value and market price of equity.

Big Company financial results in the previous financial year:

• Net income of R1,400m

• R500m dividends due to preference share holders

• Number of issued ordinary shares in the market: 35m

(iv) Calculate Big Company’s P/E ratio.

(v) State if Big Company is more likely to be a “growth” or an “income” company and explain why.