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Value of Share - Security Analysis and Portfolio Management - Solved Quiz, Exercises of Investment Management and Portfolio Theory

Course title for this quiz is Security Analysis and Portfolio Management. Instructors are Dr. Chandra Sekhar Mishra and Dr. Jitendra Mahakud. There is solved quiz related to every lecture they delivered at IIT Kharagpur. This quiz key points are: Valuation, Shares, Return, Market, Risk, Pricing, Model

Typology: Exercises

2011/2012

Uploaded on 10/22/2012

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NPTEL
Course Name: Security Analysis and Portfolio Management
Department: VGSOM, IIT Kharagpur
Instructors: Dr. Chandra Sekhar Mishra & Dr. Jitendra Mahakud
___________________________________________________
Session # 12: Valuation of Equity Shares – II
Q.1: Ken Limited has just declared Rs.6.00 as dividend per share (DPS). The beta of
Ken’s stock is 0.8. The market rate of return and risk free rate of return are 14% and 7%
respectively.
a) If the DPS of Ken Limited is expected to remain constant, what is the value of share?
b) If the DPS is expected to grow @6% per annum constantly, what is the value per
share?
Ans.:
Applying capital asset pricing model,
The expected rate of return = k
e
= R
f
+ β*(R
m
– R
f
) = 0.07 + 0.8 * (0.14 – 0.07) = 0.126
= 12.6%
a) Value per share = DPS / k
e
= Rs.6.00 / 0.126 = Rs.47.62
b) DPS
1
= DPS
0
* (1 + g) = Rs.6.00 * 1.08 = Rs.6.48
Value per share = DPS
1
/ (k
e
– g) = Rs.6.48 / (0.126 – 0.06) = Rs.98.18
Q.2: Zairo Limited has just declared Rs.5.00 as dividend per share. This is expected to
grow at 15% for the next three years, then @ 10% for subsequent 2 years and further @
6% constantly per annum from 6
th
year onwards. If one’s expected rate of return is 14%,
how much one should pay for buying the share?
Ans.: This is a multi stage dividend model.
Expected dividend per share by taking the appropriate growth rates:
Year: 0
1
2
3
4
5
6
DPS
(in Rs.)
5.0000
5.7500
6.6125
7.6044
8.3648
9.2013
9.7534
Present value of DPS
@ 14% (in Rs.)
5.0439
5.0881
5.1327
4.9526
4.7789
Present value of Dividends 1 through 5 = Rs. 24.9962
Terminal value at the end of year 5 = DPS6 / (k
e
– g) = Rs.9.7534 / (0.14 – 0.06) =
Rs.121.9171
Present value of terminal value = Rs.121.9171 / (1 + k
e
)
5
= Rs.63.3199
Value per share = Rs.24.9962 + Rs.63.3199 = Rs.88.62
Q.3: Find the value of XYZ Co’s equity share by using free cash flow to firm (FCFF)
approach with the help of following information.
SOURCES OF
FUNDS
2009-10
APPLICATION OF
FUNDS
2009-10
Shareholders’ funds
Gross fixed assets 1,100
Equity share capital (12
crore shares of Rs.10
each)
120
Less: accumulated
depreciation 400
pf2

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NPTEL

Course Name: Security Analysis and Portfolio Management

Department: VGSOM, IIT Kharagpur

Instructors: Dr. Chandra Sekhar Mishra & Dr. Jitendra Mahakud


Session # 12: Valuation of Equity Shares – II

Q.1: Ken Limited has just declared Rs.6.00 as dividend per share (DPS). The beta of Ken’s stock is 0.8. The market rate of return and risk free rate of return are 14% and 7% respectively. a) If the DPS of Ken Limited is expected to remain constant, what is the value of share? b) If the DPS is expected to grow @6% per annum constantly, what is the value per share?

Ans.: Applying capital asset pricing model, The expected rate of return = ke = Rf + β*(Rm – Rf) = 0.07 + 0.8 * (0.14 – 0.07) = 0. = 12.6% a) Value per share = DPS / ke = Rs.6.00 / 0.126 = Rs.47. b) DPS 1 = DPS 0 * (1 + g) = Rs.6.00 * 1.08 = Rs.6. Value per share = DPS 1 / (ke – g) = Rs.6.48 / (0.126 – 0.06) = Rs.98.

Q.2: Zairo Limited has just declared Rs.5.00 as dividend per share. This is expected to grow at 15% for the next three years, then @ 10% for subsequent 2 years and further @ 6% constantly per annum from 6th^ year onwards. If one’s expected rate of return is 14%, how much one should pay for buying the share? Ans.: This is a multi stage dividend model. Expected dividend per share by taking the appropriate growth rates: Year: 0 1 2 3 4 5 6

DPS (in Rs.) 5.0000 5.7500 6.6125 7.6044 8.3648 9.2013 9.

Present value of DPS @ 14% (in Rs.)

Present value of Dividends 1 through 5 = Rs. 24. Terminal value at the end of year 5 = DPS6 / (ke – g) = Rs.9.7534 / (0.14 – 0.06) = Rs.121. Present value of terminal value = Rs.121.9171 / (1 + ke)^5 = Rs.63. Value per share = Rs.24.9962 + Rs.63.3199 = Rs.88.

Q.3: Find the value of XYZ Co’s equity share by using free cash flow to firm (FCFF) approach with the help of following information. SOURCES OF FUNDS

2009-10 APPLICATION OF

FUNDS

Shareholders’ funds Gross fixed assets 1, Equity share capital ( crore shares of Rs. each)

120 Less: accumulated depreciation

Reserves and Surplus 280 Net fixed assets 700 10% Loan 600 Net working capital 300 1,000 1,

The EBIT of XYZ for 2009-10 is Rs.250 crore. Depreciation for the year is Rs. 70crore The company is subject to 40% tax rate. The growth in sales, depreciation NOPAT (net operating profit after tax), gross fixed assets and net working capital will be 18% for the first three years, 10% for the next two years and 7% thereafter. There will be no change in the tax rate and present debt ratio. The expected rate of return of equity shareholders is 16%. Ans.: The net operating profit after tax for 2009-10 = EBIT * (1 – tax rate) = Rs.250crore * (1 - 0.40) = Rs.150crore. Debt ratio = 0. Post tax cost of debt: 0. Weighted average cost of capital (k) = Wd * Kd + We * Ke = 0.60 * 0.06 + 0.40 * 0.16 =

Forecasted FCFF:

Year: 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015- Growth rate (%) 18% 18% 18% 10% 10% 7% Assets (end value) 1,000 1180.00 1392.40 1643.03 1807.34 1988.07 2127. NOPAT 150.00 177.00 208.86 246.45 271.10 298.21 319. Depreciation 70.00 82.60 97.47 115.01 126.51 139.16 148. Increase in assets 180.00 212.40 250.63 164.30 180.73 139. FCFF 79.60 93.93 110.84 233.31 256.64 328. Discounted value of FCFF (@10%)

The terminal value of the firm = FCFF 6 / (k – g) = 323.83 / (0.10 – 0.07) = Rs.10, crore Present value of FCFF from 2010-11 till 2014-15 = Rs.551.97 crore Present value of terminal value = 10,961 / (1+.10)^5 = Rs.6805.85 crore Total value of the firm = Rs.7357.81 crore / 12 = Rs.613. Value of equity = Value of firm – value of debt = Rs.7357.81 crore – Rs.600 crore = Rs.6,757.81 crore Value per share = Rs.6,757.81 crore /