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    Equity Valuation - 2

    Uploaded by

    Pulkit Malhotra
    1. The document contains 3 problems solving calculations related to dividend valuation models. 2. The first problem calculates the current price of a share using the single period valuation model, given the expected future dividend and price, and required rate of return. 3. The second problem calculates the intrinsic value of a share using the constant growth model, given the expected dividend growth rate and required rate of return. 4. The third problem calculates the expected rate of return on a share, given the current price, expected dividend, and dividend growth rate.

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    Equity Valuation - 2

    Uploaded by

    Pulkit Malhotra
    27 views8 pages
    1. The document contains 3 problems solving calculations related to dividend valuation models. 2. The first problem calculates the current price of a share using the single period valuation model, given the expected future dividend and price, and required rate of return. 3. The second problem calculates the intrinsic value of a share using the constant growth model, given the expected dividend growth rate and required rate of return. 4. The third problem calculates the expected rate of return on a share, given the current price, expected dividend, and dividend growth rate.

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    Equity Valuation -2

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    1. The document contains 3 problems solving calculations related to dividend valuation models. 2. The first problem calculates the current price of a share using the single period valuation model, given the expected future dividend and price, and required rate of return. 3. The second problem calculates the intrinsic value of a share using the constant growth model, given the expected dividend growth rate and required rate of return. 4. The third problem calculates the expected rate of return on a share, given the current price, expected dividend, and dividend growth rate.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    27 views8 pages

    Equity Valuation - 2

    Uploaded by

    Pulkit Malhotra
    1. The document contains 3 problems solving calculations related to dividend valuation models. 2. The first problem calculates the current price of a share using the single period valuation model, given the expected future dividend and price, and required rate of return. 3. The second problem calculates the intrinsic value of a share using the constant growth model, given the expected dividend growth rate and required rate of return. 4. The third problem calculates the expected rate of return on a share, given the current price, expected dividend, and dividend growth rate.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 8

    1.

          Udana’s equity share is expected to provide a dividend of Rs. 2.00 and fetch a price of Rs. 18.0
    year hence. What price would it sell for now if investor’s required rate of return is 12 percent?
    Solution : Calcuation of current price
    P0 = [D1/(1+r)] + [P1 / (1+r)]
    P0 = [2.00 /(1+0.12)] + [18 / (1 +0.12)]
    17.86
    Current price = Rs. 17.86

    2.  The expected dividend per share on the equity share of Prestige Ltd., is Rs. 20.00. The dividend p
    share of Prestige Ltd., has grown over the past five years at the rate of 5 percent per year. Assume th
    growth rate and market price of equity share will continue in future. What is fair estimate of the
    intrinsic value of the equity share of Prestige Ltd., , if required rate of return is 15 percent?

    Solution : Calculation of intrinsic value


    P0 = D1 / (r-g)
    P0= 20 / ( 0.15 - 0.05)
    200
    Intrinsic Value = Rs. 200

    3. The expected dividend per share of Fortune Ltd., is Rs. 50.00. The dividend is expected to grow a
    the rate of 6 percent per year. If price per share now is Rs. 500.00. What is the expected rate of retur

    Solution : Calculation of expected rate of return


    r = D1 / (P0 +g)
    r = 50 / (500 + 0.06)
    0.10
    Expected rate of return = 10 percent
    etch a price of Rs. 18.00 a
    rn is 12 percent?
    Single Period Valuation Method

    1.78571 16.0714

    . 20.00. The dividend per


    ent per year. Assume the
    air estimate of the
    s 15 percent?

    d is expected to grow at
    e expected rate of return?
    1.      ABC Ltd... earnings and dividends have been growing at a rate of 18 percent per a
    that the growth rate will fall to 12 percent for the next 4 years. Thereafter, the growth
    share was Rs. 20.00 and the investors’ required rate of return on ABC Ltd.

    Three step for calcuating Intrinsic value of ABC Ltd., Equity Shares
    Step -1 Dividend stream during the first eight years when ABC Ltd. , would enjoy a relatively h

    Year Dividend
    1 20 D0 (1+gn)1
    2 20 D0 (1+gn)2
    3 20
    4 20
    5 20
    6 20
    7 20
    8 20

    Step : 2 Calculation of price of the share at the end of 8 years - constant growt

    P8= [D9/ r - gn)

    718.42 / (1.15)8

    Step 3: Instrinc Value


    168.41+234.92 403.33
    owing at a rate of 18 percent per annum. This growth rate is expected to continue for 4 years. Af
    xt 4 years. Thereafter, the growth rate is expected to be 6 percent for ever. If the last dividend pe
    quired rate of return on ABC Ltd., is 15 percent. What is the intrinsic value per share?

    y Shares
    ABC Ltd. , would enjoy a relatively high rate of growth will be:
    D0 (1+gn)
    Growth Rate Dividend Stream
    1.18 23.60
    1.39 1.39 27.85
    1.64 1.64 32.86
    1.94 1.94 38.78
    2.17 2.17 43.43
    2.43 2.43 48.64
    2.72 54.48
    3.05 61.01

    nd of 8 years - constant growth model

    or [D8 (1+gn) / (r-gn)


    20 (1.18)4 (1.12)4 (1.06)]/0.15 -0.06

    718.42

    234.92
    ed to continue for 4 years. After
    or ever. If the last dividend per
    sic value per share?

    PV Factor (at 15%) PV of Dividend Stream


    0.870 20.52
    0.756 21.05
    0.658 21.62
    0.572 22.18
    0.497 21.58
    0.432 21.01
    0.376 20.48
    0.327 19.95
    168.41
    1.      A company’s current price of share is Rs. 60 and dividend per share is
    Rs. 4. If its capitalization rate is 12 percent, what is the dividend growth
    rate?

    P0= D 1/ r -g D (1+g) /r-g

    60 = 4(1+g) /0.12-g
    7.2 -60g = 4 + 4g
    (-64g = -3.2)
    g= -3.2/ -64
    g= 0.05 or 5%
    1.      The price of a company’s share is Rs. 80 and the value of growth
    opportunities is Rs. 20. If the company’s capitalization rate is 15
    percent, what is the earnings-price ratio? How much is EPS?

    P0 = [EPS1/ke] +Vg
    EPS1/ P0 = ke [1-(Vg/P0)] = 0.15 [1-(20/80)]
    0.15(1-0.25)=0.1125 or 11.25%
    EPS1/80 =0.1125
    EPS1 = 80 *0.1125 = Rs. 9
    3

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