5

Question 1
J Limited K Limited
Opening Net Assets 450,000 360,000
Profit 81,000 86,400
Dividend (56,700) (43,200)
Closing Net Assets 474,300 403,200

Cost of Equity 20% 25%

Required
Calculate the market value of both companies

Question 2

Dividend history of Aphlahum Limited is as under:

Year Dividend
2001 45.20
2002 48.82
2003 53.21
2004 58.53
2005 63.80

MV per share is Rs 650

Required
Calculate Cost of equity

Question 3

Gulab Limited has start business with a unique product and is

expecting rapid growth in profits and dividends in near future. The
company's dividend are expected to be:

Dividend for year 1 40 per share

Growth rate for first 5 years 18%
Growth rate beyond 5 years 6%
Cost of equity 15%

Required
Calculate the market value of the company (shares issued 80,000)
 5Solution

Solution 1
J Limited K Limited
Profit 81,000 86,400
Opening Net Assets 450,000 360,000
ROE(Profit/op NA) ('r) 18% 24%
Dividend 56,700 43,200
Payout ratio 70% 50%
Retention Ratio (b) 30% 50%

Growth rate (r x b) 5.40% 12.00%

Ke 20% 25%
Market Value 409,327 372,185

Solution 2

Growth model
Lastest Diviend 63.80
Oldest dividend 45.20
Time 4
Growth rate 9.00%
MV per share 650

Cost of equity 19.70%

Solution 3

Yr Dividend PV at 15%
1 40.00 34.78
2 47.20 35.69
3 55.70 36.62
4 65.72 37.58
5 77.55 38.56
PV of first 5 years 183.23

PV previous dividends 913.38 7.55x(1+6%)/(15%-6%)

Further PV 454.11

Total PV 637.34