What is the value of Wonderland’s shares, assuming that Olivia includes the extra 1%
‘credibility’ risk premium?
Olivia Stevens is trying to value Wonderland’s shares, which are not growing at all.
Wonderland declared and paid a $5 dividend last year. The required rate of return for its
industry is 11%, but Olivia is unsure about the financial reporting integrity of Wonderland’s
finance team, which has short-term focus. She decides to add an extra 1% ‘credibility’ risk
premium to the required return as part of her valuation analysis.
a) What is the value of Wonderland’s shares, assuming that the financials are
b) What is the value of Wonderland’s shares, assuming that Olivia includes the extra 1%
‘credibility’ risk premium?
c) What is the difference between the values found in parts a and b, and how might one
interpret that difference?
d) What are the key issues for valuation when the finance team adopts a short-term
focus? (1 X 4 = 4 Marks)
b) Consider the mixed streams of cash flows shown in the following table.
|Cash flow stream|
|1||$50 000||$10 000|
|2||40 000||20 000|
|3||30 000||30 000|
|4||20 000||40 000|
|5||10 000||50 000|
|Totals||$150 000||$150 000|
a) Calculate the present value of each stream using a 15% discount rate.
b) Compare the calculated present values and discuss them in light of the fact that the
undiscounted cash flows total $150 000 in each case.
(1 X 2 = 2 Marks)
|Part 3||(Word Limit: 1500+/-100) (10 Marks)|
|Note: students are strongly urged to read reviewed academic journal articles|
|and provide at least three academic journal articles in the reference.|
|Carefully consider the following two quotations:|
|“Stakeholder engagement has been defined as practices that the organisation undertakes|
|to involve stakeholders in a positive manner in organisational activities. In defining|
|stakeholder engagement in this manner, it is manifest that many areas of organisational|
|activity involve stakeholder engagement. Stakeholder engagement is not the exclusive|
|domain of socially responsible firms, nor is it the exclusive domain of socially|
|responsibility activities within firms” (Greenwood 2007: p.317-318).|
|The above quotation is taken from: Greenwood, M. (2007), ‘Stakeholder engagement: beyond|
|the myth of corporate responsibility’. Journal of Business Ethics, 74, pp.315-327.|
“Stakeholder theorists have challenged traditional views that lie at the nexus of modern
economic and management theory. Among these challenged views is the special
privileged of the goal of stakeholder return, as well as the emphasis on the increasingly
sophisticated tools devised to achieve it. No well-known writer on stakeholder theory
has questioned the importance of stakeholder value, but many have written that theory
and practice should at times balance the importance of the value of money with that of
the other values.” (Donaldson, 2002: p.108).
The above section is taken from: Donaldson, T. (2002). ‘The stakeholder revolution and the
Clarkson principles’. Business Ethics Quarterly, 12, pp.107-111.
Required: You are asked to examine the concept of stakeholder engagement and its
importance to corporate governance.