Caselet on Valuation of Shares.

Joy foods is engaged in the manufacture and sales of processed foods using organic inputs. Started
with a single outlet in Parthi, it has now grown as one of the large food chain in AP. Its share sells for
₹20 per share and the most recent dividend was ₹1. Its share capital consists of 100000 Shares with a
face value of ₹10 each. A leading MNC is showing interest in co-investing in Joy Foods Ltd and wants
to acquire 30% share. It has engaged an analyst for valuing the shares. The analyst is using 3 stage
Dividend Distribution Model (DDM) and estimates that the beginning growth rate of dividends will be
10%. But this will last only for 2 years. Then the g will decline to a constant long run normal growth
rate of 7% over 3-year transition period. It is expected to grow at this constant rate for ever. Even the
long run growth rate is more than the industry average. The analyst is of the view that the details
provided by the company in determining growth rate are very exhaustive and the model he used for
forecasting is exponential smoothing model which is generally accepted as a very reliable one. The
MNC is keen to finalise the deal in about one month. As you are doing MBA and study the valuation
models, you are required to answer the following questions.

1. What is the expected growth rate in year 3, the first year of Stage 2, the transition period.
2. What are the expected dividends in year 5 and 6
3. If the Analyst feels that 12% is an appropriate discount rate, what is the PV of expected
dividends?
4. As the current market price of the share is ₹20, what is the expected return associated with
the stock.
5. If the MNC agrees to go by the valuer’s report, what is the amount which the MNC has to pay
for acquiring 30% of Joy food’s shares.
6. Is the price as per Analyst’s report is more or less than the market price? Why the MNC is
willing to pay a price different from the market price.