EQUITY SHARES VALUATION MODELS

Illustration 1

Akshay Ltd. is a zero growth company paying dividend of  8 per share and selling for  60 per share. The required rate of return is 10%. Find the value of company’s shares.

Illustration 2

Tata Ltd. paid dividend  1.80 per share. The forecast is the dividend will grow by 5% per year into the infinite future. If the capitalisation rate is 11% and the current market price of the company’s shares is  40, find out its intrinsic value.

Illustration 3

Mamta Ltd. has expected dividend of  10. Earning and dividend are expected to grow at a rate of 20 per cent. The capitalisation rate and current market price are 25% and  280 respectively. Is the share fairly priced?

Illustration 4

BSES paid  2.50 as dividend per share on its equity shares for the last year. Dividends are expected to grow at 10 per cent year for an indefinite future. (a) What is its expected rate of return if its current market price is  20? (b) If the required rate of return is 12%, what would be the value of stock? (c) Is it worth investing in the share?

Illustration 5

Prof. Navin wishes to invest in the shares of ‘A’ Ltd. whose expected dividend in the first year is  4 in past the company’s dividend per share has grown at an average rate of about 5 per cent annum. Prof. Navin expects that the dividend will grow at the same in future. The required rate of return on the shares is 20% per annum. The market of the share is  16. Advise Prof. Navin whether he should buy the share?

Illustration 6

Sonam Ltd. paid dividend of 10%. Face value per share is  10 per share; Earnings and dividends are expected to grow at a rate of 20 per cent. The required rate of return and the current market price are 25% and  240 respectively. Is the fairly priced?

Illustration 7

Sunrise Ltd. is currently paying dividend of  1.50 on its face value of  10. Earnings and dividends are expected to grow at 5% annual rate indefinitely. Investors require 9% rate of return on their investments. The company is considering several business strategies and wishes to determine the effect to these strategies on the market price of its share.

(a)            Continuing the present strategy will result in the expected growth rate and required               rate of return as above.

(b)               Expanding sales will increase the expected dividend growth rate to 7% but will increase the risk of the company. As a result, the investor’s required rate of return will increase to 12%.

(c)                Integrating into retail stores will increase the dividend growth rate to 6 per cent and increase the required rate of return to 10 per cent.

You are required to find out the best strategy from the point of view of the market price.

Illustration 8

Samrudhi Ltd., paid  2.50 as dividend per share on its equity shares for year ended 31st March, 2010. Dividends are expected to grow at 10 per cent annum for an indefinite future. The current market price of the share is  80.

1. What is the expected rate of return?
2. If the required rate of return is 12%, what would be the value of stock?
3. Is it worth investing in the share?

Illustration 9

MNO Ltd. share are quoted at  80 on BSE currently. The company pays Re.1 per share as dividend and the investors expects a growth rate of 5% per year.  Compute:

i)                    Expected rate of return

ii)                  If the required rate is 10% p.a., calculate the indicative market price

iii)                Advise on the basis of the indicative market price computed above whether it is profitable to invest in the shares of MNO Ltd. at its current price on BSE.

Illustration 10

Meghna Ltd. dividend for next year of  1.80 per share. The forecast is that dividend will grow by 8 per cent per annum into the infinite future. If the required rate of return is 10% and the current market price of the company’s stock is  60, find out the intrinsic value of the company’s share. Is it worth investing in the company?

Illustration 11

A Ltd. paid dividend of   3 per share in the last year. The dividend is expected to grow at a constant rate of 5% in the future. If the required rate of return is 10%, what would be intrinsic value of the share.

Illustration 12

As per the financial accounts for the last year, the company has paid dividend @ 20% . The paid up equity capital is  6,00,000 and 10% preference share capital  1,00,000. Operating profit is  4,00,000. The tax rate is 32%. The company expects a growth rate of 5%. Compute Value per  Equity Share.

(a)    Dividend Growth Approach.

(b)   Dividend Approach.

(c)    Earnings Growth Approach.

(d)   Earning Approach.

Illustration 13

Anand Ltd. dividend for next year of  1.80 per share. The forecast is that dividend will grow by 5 per cent per annum into the infinite future. If the required rate of return is 10% and the current market price of the company’s stock is  40, what is expected value of the stock? Should you make investment in the stock.

Illustration 14

A mining company’s iron reserves are being depleted, as result of which the company earnings and dividend is declining at rate of 8%. If the previous year dividend was  10 and required rate of return is 15%, what would be current price of equity share of the company?

Illustration 15

The Chemical and Fertilizers Ltd. has been growing at the rate of 18% in the recent years. This abnormal growth rate is expected to continue for another 4 years and then likely to grow at normal rate of 6%. Dividend paid last year was  3 per share. Find out the intrinsic value of share if the required rate of return is 12%.

Illustration 16

An investor has invested in a company which is growing at rate of 15% for 5 years. Thereafter dividend is expected to grow of 7%. The capitalisation rate is 10% and current dividend is Re. 1 per share. Determine the value per share.

Illustration 17

OM Ltd. paid dividend of  0.75 per share. Over the next year, it is expected to pay dividends of  2 per share. In the third year, it is expected to pay dividend at  3 per share. The dividend will grow by 10 per cent per year indefinitely. If the required rate of return is 15% and current market price is  55, find the intrinsic value of the company’s share.

Illustration 18

The after tax profits of SCOrE Ltd. are expected to be  18 crores. The company does not have any preference shares outstanding, whereas the equity capital is  90 crores divided into shares of  10 each. The company is operating is an industry whose P/E multiple is 10. Using P/E ratio model, determine the price at which the stock should be purchased.

Illustration 19

Sukhada Ltd. paid  2.50 as dividend per share on its equity shares for the last year. Dividends are expected to grow at 10 per cent per year for an indefinite future. (a) What is its expected rate of return if its current market price is  20? (b) If the required rate of return is 12%, what would be the value of stock? (c) Is it worth investing in the share?

Illustration 20

What will be the intrinsic value of equity shares of ‘SE’ Ltd. based on the following data.

Last dividend                                      3 per share

Growth rate for 1–3 years                         20% p.a.

Growth rate for 4–6 years                         10% p.a.

Growth rate beyond 6 years                       5% p.a.

The investor’s required rate of return is 14%.

For Solution/ Answer Please refer IAPM Textbook By Author Pawan Jhabak, Himalaya Publication.

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