1. X and Y are two fast growing companies in the engineering industry.

They are close competitors

and their assets composition, capital structure and profitability records have been very similar
for several years. The company “X” tries to maintain a non-decreasing dividend per share, while
the company Y maintains a constant dividend payout ratio. Their recent earnings per share
(EPS), dividend per share (DPS) and share price (P) history are as follows:-

Year Company X Company Y

EPS DPS P (range) EPS DPS P (range)
1 Rs. 9.3 Rs. 2 Rs. 75 – 90 Rs. 9.5 Rs. 1.9 Rs. 60 – 80
2 7.4 2 55 – 80 7 1.4 25 – 65
3 10.5 2 70 – 110 10.5 2.1 35 – 80
4 12.75 2.25 85 – 135 12.25 2.45 80 – 120
5 20 2.5 135 – 200 20.25 4.05 110 – 225
6 16 2.5 150 – 190 17 3.4 140 – 180
7 19 2.5 155 - 210 20 4 130 - 190
a. Determine the dividend payout ratio (D/P) and price to earnings (P/E) ratio for both
companies for all the years
b. Determine the average D/P and P/E for both the companies over the period 1 through 7.
c. The management of Company Y is puzzled as to why their share prices are lower than those
of Company X, in spite of the better profitability record particularly of the past 3 years. As a
financial consultant how would you explain the situation?

2. Following is the EPS record of AB Ltd. over the past 10 years.

Year EPS Year EPS

10 20 5 12
9 19 4 6
8 16 3 9
7 15 2 (2)
6 16 1 1
a. Determine the annual dividend paid each year in the following cases:
i. If the firm’s dividend policy is based on a constant dividend payout ratio of 50% for
all years.
ii. If the firm pays dividend at Rs. 8 per share and increases it to Rs. 10 per share when
earnings exceed Rs. 14 per share for the previous 2 consecutive years.
iii. If the firm pays dividend at R. 7 per share each year except when EPS exceeds Rs. 14
per share, when an extra dividend equal to 80% of earnings beyond Rs. 14 would be
paid.

3. The following financial statistics is available in respect of a listed company:

Price-earnings (P/E) ratio 8 times

Number of equity shares 4 lakh
Earnings available to equity shareholders Rs. 40 lakh

1
 Earnings per share 10
Market price per share 80
The company is currently considering whether it should use Rs. 20 lakh of its earnings to pay
cash dividend or to repurchase shares at Rs. 85 per share.
a. How many equity shares can be repurchased, using the funds that would have been
disbursed to pay the cash dividend?
b. Determine the EPS after the proposed share repurchase.
c. Assuming no change in the current P/E ratio, compute the market price after share
repurchase.
d. Compare and contrast the shareholders positions under the dividend and repurchase
alternatives.
e. Is Rs. 85 the equilibrium share repurchase price?
f. In case share repurchase price is higher than Rs. 85, which category of shareholders – those
who have sold their shares or those who have not – are financially better off?

4. Calculate the Intrinsic Value of the following companies using the data given in the table below.
Comment whether it is an overvalued or undervalued stock.

Company EPS 10 years Interest 10 Years Market

Sales rate of 10 Bond Price
Growth years Fixed Yield
Deposit
TCS 25.90 14.6 3220
ONGC 8.39 13.4 133.90
WIPRO 10.02 7.87% 6.25% 7% 416.90
ITC 12.22 8.62 330.55
RELIANCE 59.24 6.92 2568.60