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VOLUME 1 Valuation of Equity-FOR ONLY RUNNING BATCH
VOLUME 1 Valuation of Equity-FOR ONLY RUNNING BATCH
QUESTION NO.4A Tata is to pay dividend of Rs. 2.15 at the end of the year and it is expected to
grow at 11.2% p.a , and Cost Of Equity is 15.2% per annum,
(i) What is its intrinsic value i.e Po as on today?
(ii) What is the next years expected price at the end of Year 1?
(iii) If an investor wants to buy Tata stock now and sell it after receiving Rs. 2.15 dividend a year
from now, what is the expected capital gain in % terms? What is the dividend yield and what is the
holding period return?
QUESTION NO.5A(Exam Question)(8 Marks)- Z Ltd. will have a growth rate of 12% per
annum in the next 2 years. The growth rate is likely to fall to 10% for the third year and fourth year.
After that the growth rate is expected to stabilize at 8% p.a forever. If dividend paid was Rs. 1.50
per share and the investors’ required rate of return is 16%, find out the intrinsic or Fair value i.e Po
per share of Z Ltd. as of date i.e as on today .You may use the following table:
Years 0 1 2 3 4 5
Discounting Factor at 16% 1 0.86 0.74 0.64 0.55 0.48
QUESTION NO.6A(Exam Question)The Beta Co-efficient of Target Ltd. is 1.4. The company
has been maintaining 8% rate of growth in dividends and earnings. The last dividend paid was Rs.
4 per share. Return on Government securities is10%.Return on market portfolio is 15%. The
current market price of one share of Target Ltd. is Rs. 36. What will be the equilibrium or fair price
per share of Target Ltd. Would you advice purchasing the share?
QUESTION NO.7 Arvind has invested in Gujarat Chemicals. The capitalisation rate of the company
is 15 % and the current dividend i.e Do is Rs. 2 per share. Calculate the price of the company’s
equity share if the company is slowly declining with an annual decline rate of 5% in the dividend.
QUESTION NO. 8 (Study Material)(Exam Question) Piyush Ltd presently pay a dividend of
Re. 1.00 per share and has a share price of Rs. 20.00.
(i) If this dividend were expected to grow at a rate of 12% per annum forever, what is the firm’s
expected or required Cost Of Equity using a dividend-discount model approach?
(ii) Instead of this situation in part (i), suppose that dividend were expected to grow at a rate of
20% p.a. for 5 years and 10% per year thereafter. Now what is the firm’s expected, or Cost Of
Equity ?
[Ans:18.82%(approx)][Hint at 15% NPV=+12.92 & at 20% NPV = -3.99 ]
2
QUESTION NO.9(Exam Question)A Ltd. has a book value per share of Rs. 137.80. Its return
on equity is 15% and it follow a policy of retaining 60% of its earnings. If the opportunity Cost Of
Equity is 18%, what is price of share today as per Perpetual Growth Model?
QUESTION NO.10A If Current MPS of the Company as per its existing policy is Rs. 10 and its
has 1,00,000 shares outstanding .Now Company is undertaking an investment which is giving a
positive NPV of Rs. 2,00,000.What should be the revised MPS ?
QUESTION NO.12 The dividends paid by a company over the last few years are as follows
Year DPS (Rs.)
1997 1.00
1998 1.10
1999 1.21
2000 1.33
2001 1.46
Estimate the growth rate ?
QUESTION NO.13A(6 Marks)(Exam Question) Following Financial data are available for PQR
Ltd. for the year ending 2008
(Rs. In lakh)
Debentures 125
bonds (2007) 50
Equity shares (Rs. 10 each) 100
Reserve and Surplus 300
Total Assets 600
Assets Turnovers ratio 1.1
Interest rate of Debenture & Bond 8%
Tax rate 40%
Current market Price of Shares 14
Required Rate of return of investors (Ke) 15%
Operating Profit Margin 10%
Dividend payout ratio for the year ending 2008 (Do) 16.67%
You are required to:
(i)Draw income statement for the year
3
QUESTION NO.17A(RTP)Z Co. is a watch manufacturing company and is all equity financed
and has paid up capital Rs.10,00,000 (Rs.10 per shares) The other data related to the company is as
follows:
Year EPS (Rs.) Dividend Per Share (Rs.) Share Price (Rs.)
2004 4.20 1.70 25.20
2005 4.60 1.80 18.40
2006 5.10 2.00 25.50
2007 5.50 2.20 27.50
2008 6.20 2.50 37.20
Z Co. has hired one management consultant, Vidal Consultants about the future earnings and other
related item for the forthcoming years. As per Vidal Consultants’s report
(1) The earnings and dividend will grow at 25% for the next two years.
(2) Earnings are likely at rate of 10% from 3rd year and onwards.
(3) Further if there is reduction in earnings growth occurs dividend payout ratio will increase to
50%
.Calculate the estimated share price and Current P/E Ratio (taking Fair Po calculated by you and
given current EPS) which analysts now expect for Z Co., using the dividend valuation model. You
may further assume that cost of equity is 18%.
QUESTION NO.21(8 Marks)SAM Ltd. has just paid a dividend of Rs. 2 per share and it is
expected to grow @ 6% p. a. After paying dividend, the Board declared to take up a project by
retaining the next three annual dividends. It is expected that this project is of same risk as the
existing projects.
The results of this project will start coming from the 4th year onward from now. The dividends will
then be Rs. 2.50 per share and will grow @ 7% p. a.
An investor has 1,000 shares in SAM Ltd. and wants a receipt of atleast Rs. 2,000 p.a. from this
investment.
(a)Show that the market value of the share is affected by the decision of the Board. (b)Also show
as to how the investor can maintain his target receipt from the investment for first 3 years and
improved income thereafter, given that the cost of capital of the firm is 8%.
QUESTION NO.22A(Exam Question)(6 Marks) Sahu & Co. earns Rs. 6 per share having
capitalization rate of 10 % and has a return on investment at the rate of 20 %.
(i) According to Walter’s Model, what should be the price per share at 30 % dividend payout ratio?
(ii) Is this the optimum payout ratio as per Walter?