Divesh

PGP/24/387

FMI Assignment-10

Q7. All the investors who invests for the short horizon will look for dividends as well as capital gains.
However, the value of stock price majorly depends upon the payment of dividends. Also, investors
have a clear distinction between growth stocks and income stocks. If they want capital gains, they
will buy growth stocks and will buy income stocks for the cash dividends.

Q17. R= 8%; g=5%; Div1= $10

As growth rate is 5%,

Div2= 10.5

Div3= 11.025

Div4=11.576

Div5 and onwards =17.36

PV of first 4 dividends = 10/(1+0.08) + 10.5 / (1+ 0.08)^2 + 11.025 / (1+ 0.08)^3+ 11.576 / (1+ 0.08)^4

= 35.52

Value of dividends at year 5 = 17.36 / 0.08 = 217

PV of dividends = 217 / (1+0.08)^5 = 147.68

Total stock price = 147.68 + 35.52

=183.2

Q27. Horizon Value = Earning per share/ cost of equity

As the firm will run out of positive investment opportunities (PVGO =0), the company will return its
earnings to the shareholders and the current EPS would be dividend.

Q33. G= 5%; Annual fee= 0.5%; Assuming r=10%

When Div yield = 5%

PV = (100*0.005) / (0.1-0.05)

= 10.1 million

When Div yield = 4%

PV = (100*0.005) / (0.1-0.04)

= 8.3 million
 Divesh
PGP/24/387

Reeby’s Case

A)

Dividen Ploughback
Year BVPS EPS d Payout Ratio Ratio ROE
2011 9.8 -2.1 0 0% 100% -21%
2012 7.7 -0.7 0 0% 100% -9%
2013 7 0.23 0 0% 100% 3%
2014 7.61 0.81 0.2 25% 75% 11%
2015 8.51 1.1 0.2 18% 82% 13%
2016 9.51 1.3 0.3 23% 77% 14%
2017 10.73 1.52 0.3 20% 80% 14%
2018 11.77 1.64 0.6 37% 63% 14%
2019 13.17 2 0.6 30% 70% 15%
2020 (E) 14.4 2.03 0.8 39% 61% 14%

Average payout ratio is calculated using year 2014-19 which is equal to 25.525. (As 2020 has
expected values given and for 2011-13 payout is 0)

Average ROE is also calculated using 2014-19 which is 14.1%

Growth = 10.5%; Cost of capital = 10%

Assuming that growth will continue till 8 years and then no growth will be there

Time 0 1 2 3 4 5 6 7 8
EPS 2.03 2.24 2.48 2.74 3.03 3.34 3.70 4.08 4.51
Dividend 0.80 0.57 0.63 0.70 0.77 0.85 3.70 4.08 4.51
Horizon Value                 45.1
Cashflow 0.80 0.57 0.63 0.70 0.77 0.85 3.70 4.08 49.64

EPS for subsequent years is calculated using 10.5 as growth rate and dividend is calculated using the
average payout ratio.

After 8 years, no growth will be there, and horizon value is calculated

PV at year 8 of all the subsequent dividends = 4.51 / 0.1 = 45.1

Stock price = PV of all the cash flows

= $27.97

B)

If no growth was there since the year 1, then the price would be 2.03/0.1 = 20.3

Hence, PV of growth opportunity = 27.97 – 20.3

= 7.67
 Divesh
PGP/24/387

Recent News related to Ch-4

On 16th July 2020, VLS Finance ltd. had announced dividend payment of 15% which is equivalent to
INR 1.5 per equity share on the face value of INR 10 / share. The current dividend yield is around
2.78%The company has been declaring dividends since past 5 years

Source - https://www.moneycontrol.com/company-facts/vlsfinance/dividends/VLS#:~:text=For
%20the%20year%20ending%20March,a%20dividend%20yield%20of%202.8%25. Accessed at 13th
October, 2020