fIN630 - Investment Analysis & Portfolio Management

Fundamental Analysis Learning Objective: Developing an understanding to draw conclusions from a published set of financial statements in terms of ratio analysis. Learning Outcome: After going through this GDB, the students would be able to analyze any companys profitability and its implication upon associated stakeholders. Model Manufacturers Limited is engaged in the business of manufacturing, sale and export of "Hypothetical" products. Following is the comparative income statement taken from its recent published annual report. For the year 2011, this income statement shows losses at many stages.

Dividend Discount Model

Case: Big Gee Limited (BGL) has reported earnings per share of Rs.15 with 0.70:1 payout for the year 2011. Its dividends have been growing at a constant rate of 8% and are expected to continue at the same for foreseeable future. Mr. Young - a fresh business graduate has recently joined BGL as business analyst. On one day during his training, he was assigned a task to forecast BGLs dividend growth rate and intrinsic value of the companys stock for the next year using the famous Dividend Discount Model (DDM). Based on the data given to him, Mr. Young estimated a growth rate of 12%. For an ordinarily prudent investor in the similar industry, Young estimated a required rate of return at 10%. On this basis, he estimated the intrinsic value - an unreal price surely. While presenting his work to the other training mates, he could not defend his estimates as he has to face strong arguments about the unreal price. Mr. Old - a senior finance manager argued that the estimated growth rate by Young had resulted in the negative share price that is not acceptable in any case in the real world. Required: 1. Compute the share value as done by Mr.Young; 2. Comment on this value; & 3. Support your comments with logical reason. Important Instructions: 1. 2. 3. 4. (1.0 Mark) (0.5 Mark) (0.5 Mark)

Your discussion must be based on logical facts. The GDB will remain open for 2 working days/48 hours. Your answer should be relevant to the topic i.e. clear and concise. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course. 5. Obnoxious or ignoble answer should be strictly avoided. 6. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over. For detailed instructions, please see the GDB announcement.