This action might not be possible to undo. Are you sure you want to continue?
Q1
a.
Market price per share of the company at the end of the year (i.e P1)
i.
When dividend not paid
ii.
b.
P0
=
150
=
P1
P1
=
=
150( 1.12)  0
168
When Dividend paid
P0
=
150
=
P1
P1
=
=
150( 1.12)  8
160
New shares to be issued by the company (i.e m)
i.
When dividend not paid
m
=
PRAVINN
MAHAJAN
CA CLASESS
=
=
ii.
1,19,047.619047 shares
When dividend paid
m
=
=
=
c.
1,75,000 shares
Value of Firm (i.e nP0)
i.
When dividend not paid
nP0
=
=
=
ii.
Rs 1500 lakh
When dividend paid
nP0
=
=
=
Rs 1500 lakh
Thus market value of the Firm is same (Rs 1500 lakh) whether dividend is paid or not
Q2
a.
Market price per share of the company at the end of the year (i.e P1)
I
When dividend not paid
ii
b.
P0
=
125
=
P1
P1
=
=
125( 1.08)  0
135
When Dividend paid
P0
=
125
=
P1
P1
=
=
125( 1.08)  6
129
New shares to be issued by the company (i.e m)
i.
When dividend not paid
m
=
=
=
ii.
2962.962962 shares
PRAVINN
MAHAJAN
CA CLASESS
When dividend paid
m
=
=
=
c.
4961.240310 shares
Value of Firm (i.e nP0)
i.
When dividend not paid
nP0
=
=
=
ii.
Rs 50 lakh
When dividend paid
nP0
=
=
=
Rs 50 lakh
Thus market value of the Firm is same (Rs 50 lakh) whether dividend is paid or not
Q3
a.
Market price of share according to MM approach
i.
ii.
b.
When dividend not paid
P0
=
15
=
P1
P1
=
=
15( 1.14)  1.35
15.75
When Dividend paid
P0
=
15
=
P1
P1
=
=
15( 1.14)  0
17.10
Expected return after tax
i.
ii.
If dividend paid
Dividend Received
Dividend after ordinary tax
=
=
=
Rs 1.35
1.35 ( 1 – 0.3 )
0.945
Capital gains
=
=
15.75 – 15
0.75
Capital gains after tax
=
=
0.75( 1 – 0.26)
0.555
Total Income after Tax
=
=
0.945 + 0.555
1.5
Investment
=
Rs 15
Rate of Return
=
x 100
=
10%
Capital gains
=
=
17.10 – 15
2.1
Capital gains after tax
=
=
2.1( 1 – 0.26)
1.554
Investment
=
Rs 15
Rate of Return
=
If dividend paid
=
x 100
10.36%
PRAVINN
MAHAJAN
CA CLASESS
Q4
If r = 20% ( i.e r > ke )
If r = 10% ( i.e r = ke )
If r = 8% ( i.e r < ke )
1. DP ratio 10% i.e b = 90 %
1. DP ratio 10% i.e b = 90 %
1. DP ratio 10% i.e b = 90 %
P0 =
P0 =
P0 =
=
=
=
= Rs 180
= Rs 100
= Rs 84
2. DP ratio 40% i.e b = 60 %
2. DP ratio 40% i.e b = 60 %
2. DP ratio 40% i.e b = 60 %
P0 =
P0 =
P0 =
=
=
=
= Rs 160
= Rs 100
= Rs 88
3. DP ratio 80% i.e b = 20 %
3. DP ratio 80% i.e b = 20 %
3. DP ratio 80% i.e b = 20 %
P0 =
P0 =
P0 =
=
=
=
= Rs 120
= Rs 100
= Rs 96
4. DP ratio 100% i.e b = 0 %
4. DP ratio 100% i.e b = 0 %
4. DP ratio 100% i.e b = 0 %
P0 =
P0 =
P0 =
=
=
=
= Rs 100
= Rs 100
= Rs 100
PRAVINN
MAHAJAN
CA CLASESS
Q5
E= Rs 6, kE = 10%, r= 20% , DP = 30%
P0
PRAVINN
MAHAJAN
CA CLASESS
=
=
= Rs 102
According to Walter model, if r > KE , optimum DP ratio is 0% i.e Retention ratio should be 100%.
In given question DP is 30%, so it is not optimum ratio
Q6
Earnings of company
No. of shares
EPS
DP ratio
Dividend per share
i.
=
=
=
=
=
Rs 10,00,000
2,00,000
Rs 5
60%
Rs 3 per share
Market value per share as per Walters model
P0
=
=
=
ii.
Rs 34.26
According to Walter model, if r > KE , optimum DP ratio is 0% i.e Retention ratio should
be 100%. If DP ratio is 0% then MP will be
P0
=
=
=
Rs 52.083
Q7
Statement of EPS
Earnings
Less Preference dividend
12 % of 100 lakhs
Earnings for equity share holders
No. of shares
EPS
r
=
KE
=
PE
=
KE
=
30,00,000
12,00,000
18,00,000
3,00,000
Rs 6 per share
20%
=
x 100
=
14.285714%
Dividend per share if MP is Rs 42 per share
P0
=
42
=
42 x 0.14285714
6
DP ratio
=
d +
=
d + 8.4  d
6 – 8.4 =
d(1 
 2.4
=
 d ( 0.40)
d
=
d
=
=
=
6
x 100
100 %
)
PRAVINN
MAHAJAN
CA CLASESS
Q8
Earnings
No. of shares
EPS
Rs 2,00,000
20,000
Rs 10 per share
Total dividend
Dividend per share
Rs 1,50,000
Rs 7.5
KE
=
=
r
Current DP ratio 75%
PRAVINN
MAHAJAN
CA CLASESS
=
=
x 100
=
=
0.08 or 8%
x 100
10%
If DP ratio is 75%, then according to Walter model MP of share is
P0
=
=
=
Rs 132.81
According to Walter model if r > KE , then optimal dividend policy would be to pay Zero dividend.
Thus DP ratio 75% is not an optimum dividend policy. If no dividend is paid MP will be
P0
=
=
=
Rs 156.25
So, MP can be increased by adopting a Zero dividend policy
ii.
Company’s Dividend policy will have no effect on the market value of share if r = K E ,
i.e KE = 10%, And since PE =
So, PE at which dividend policy has no effect on market value of firm is
iii.
IF PE is 8 instead of 12.5, then
which is the inverse of PE ratio would be 12.5 (i.e
such a situation KE > r and Market price as per Walter model would be
P0
=
=
=
= 10 times
Rs 76
Since r < KE , optimum DP ratio will be 100%
) and in
Q9
Market price of share
Walter model
P0
=
=
=
Gordon Model
P0
Rs 55
=
=
=
Q10
Rs 60
MP per share according to Gordon Model
Book value per share
Return on Equity
Thus earnings
=
=
=
=
Rs 137.80
15%
15% x 137.80
Rs 20.67
DP Ratio
=
=
1  0.6
0.4 or 40%
P0
=
=
=
Rs 91.87
MP per share according to Walter Model
P0
=
=
=
Rs 103.35
MP per share according to perpetual growth model
P0
=
=
=
Rs 91.89
PRAVINN
MAHAJAN
CA CLASESS
Q11
a.
b.
MP of share
EPS
DP ratio
b
r
=
=
=
=
=
P0
=
40
=
Rs 40
Rs 12 per share
45%
1 – 0.45 =
0.55
14%
=
+ 0.077
=
0.212 or 21.2%
Dividend distributed during the year
=
=
Dividend per share
=
=
Value of share
=
P0
PRAVINN
MAHAJAN
CA CLASESS
10 Lakh x 10 x 0.20
Rs 20 lakh
Rs 20 per share
=
=
=
Q12
Rs 156.923
According to Linter model
Current Year dividend
= ( 1  A) x Last Year Dividend + EPS X DP ratio x A
a. Last year Dividend = Rs 9.8
Adjustment
45%
Pay out ratio
60%
EPS
Rs 20
Current year dividend
b. If Adjustment is 20%
Current year dividend
Q13
= ( 1 – 0.45) 9.8 + 20 x 0.6 x 0.45
=
Rs 10.79
=
=
( 1 – 0.2) 9.8 + 20 x 0.6 x 0.2
Rs 10.24
According to Linter model
Current Year dividend
= ( 1  A) x Last Year Dividend + EPS X DP ratio x A
Last year Dividend = Rs 1.2
Adjustment
0.7
Pay out ratio
0.6
EPS
Rs 3
Current Year dividend
= ( 1 – 0.7) 1.20 + 3 x 0.6 x 0.7
=
Rs 1.86
Q14
According to Linter model
Current Year dividend
= ( 1  A) x Last Year Dividend + EPS X DP ratio x A
Last year Dividend = Rs 5
Adjustment
0.5
Pay out ratio
70%
EPS
Rs 10
Current Year dividend
PRAVINN
MAHAJAN
CA CLASESS
= ( 1 – 0.5) 5 + 10 x 0.7 x 0.5
=
Rs 6
If incremental dividend to be maintained is 70%
Current Year dividend
= ( 1 – 0.7) 5 + 10 x 0.7 x 0.7
=
Rs 6.4
If incremental dividend is 30%
Current Year dividend
Q15
a.
= ( 1 – 0.3) 5 + 10 x 0.7 x 0.3
=
Rs 5.6
According to residual approach, current year’s profits or earnings can be used for
financing capital expenditure and after financing capital expenditure, balance is
distributed as dividend
Current year profit
=
x 20
=
Rs 600,00,000
So, capital expenditure of Rs 600,00,000 can be incurred without raising additional equity
b. i.
Equity Funds
ESC
Reserves
300,00,000
1500,00,000
1800,00,000
Debt
12% debt
15% debt
Debt equity ratio
Capital expenditure
Raised from equity
1000,00,000
200,00,000
1200,00,000
=
12 : 18
=
2:3
=
550 lakh
reserves
=
550 lakh x
Raised from debt
=
=
Rs 330 lakh
Rs 220 lakh
=
=
Rs 600 lakh – Rs 330 lakh
Rs 270 lakh
Dividend distribution
ii.
c.
Dividend distribution without bothering about capital structure
Rs 600 lakh – 550 lakh
=
Rs 50 lakh
PRAVINN
MAHAJAN
CA CLASESS
If capital expenditure is Rs 800 lakh
i.
Dividend distribution without affecting capital structure
Debt equity ratio
=
2: 3
Capital Expenditure financed by equity reserves
800 lakh x
ii.
Dividend distribution
=
=
Dividend per share
=
= Rs 480 lakh
600 lakh – 480 lakh
120 lakh
= Rs 4 per share
Dividend distribution without bothering about capital structure
Since capital expenditure of Rs 800 lakh is more than available profit of
Rs 600 lakh, so nil dividend
Q16
i.
Statement of Dividend per share and external financing under residual approach
Particulars
1
2
3
4
Profit after tax
Capital expenditure
40
10
45
50
50
20
35
50
Profit for distribution
30

30

Dividend per share
(no of shares 8 crore)
External financing
3.75

5
3.75

15
ii
Statement of Dividend per share and external financing if Debt equity ratio
of 7:3 is to be maintained
Particulars
Profit after tax
Capital expenditure
1
2
3
4
40
10
45
50
50
20
35
50
Capital Expenditure from equity 10 x
PAT for distribution
Dividend per share
External financing
=3
37
50 x
= 15
30
= 4.625
10 – 3 = 7
20 x
=6
44
50 x
= 15
20
= 3.75
= 5.5
50 – 15 = 35
20 – 6 = 14
= 2.5
50 – 15 = 35
iii.
Statement of Dividend per share and external financing required
if Dividend Payout ratio is 40%
Particulars
1
2
3
4
Profit after tax
Capital expenditure
40
10
45
50
50
20
35
50
Profit for dividend (40%)
16
18
20
14
Dividend per share
Profit for capital exp.
External financing
iv.
=2
24

= 2.25
27
23
= 5.5
30

= 2.5
21
29
Statement of Dividend per share and external financing if DP ratio
is 30% and minimum dividend per share to be Rs 1.5 per share
Particulars
Profit after tax
Capital expenditure
1
40
10
2
45
50
3
50
20
4
35
50
Total dividend, if div per share
is Rs 1.5 per share
12
12
12
12
Total dividend if
DP ratio is 30%
12
13.5
15
10.5
Dividend payable
Dividend per share
12
1.5
13.5
1.6875
15
1.875
12
1.5
Profit for cap exp.
28
31.5
35
23
External financing

18.5

27
v.
I
II
III
IV
3.75
60 cr
20 cr
16.375
131 cr
91 cr
8.5
68 cr
52 cr
6.5625
52.5 cr
45.5 cr
Div per share
Total Dividend
External financing
In case II both shareholders and Financial institutions will be happy
PRAVINN
MAHAJAN
CA CLASESS
Q17
Statement of Current market Price
A
640
p
640 – p
64 – 0.10p
B
600
q
600 – q
60 – 0.10q
Capital gains after tax
(640 – p) – (64 – 0.10p)
= Rs 576 – 0.90p
(600 – q) – (60 – q)
= Rs 540 – 0.90q
Dividend receivable
Less tax on dividend 15%

Rs 40
Rs 6
Dividend income after tax

40 – 6 = Rs 34
Return on investment in shares
Rs 576 – 0.90p
540 – 0.90q + 34
Return on investment
16%
16%
Current MP
0.16 =
0.16 =
Market value of share after 1 year
Less Current market price
Capital gains
Less tax on capital gains @ 10%
p
Q18
= 543.40
p = 541.51
Statement of cash flow if dividend distributed Now
Earnings per share
Dividend Pay out
No. of share outstanding
Total dividend payout
( 60 x 2crore)
x 12,000
Less Dividend distribution tax
Rs 200
Rs 60
2 crore
12000 lakh
1655.17 lakh
Amount received by investors
Rs 10344.83 Lakh
Amount invested in Bank
Rs 10344.83 lakh
Interest on Bank deposits
9%
Personal Income tax at 25% on 9% interest
Effective interest rate on deposits
Post maturity value of deposits
2.25%
6.75%
10344.83 x (1.0675)
3
Rs 12,584.49 lakh
PRAVINN
MAHAJAN
CA CLASESS
Statement of cash flow if dividend distributed 3 years later
Earnings per share
Dividend payout (200 x 0.3)
No of shares outstanding
Total amount payable for dividend payout
Amount invested in Bank by MPL
Interest on Bank deposits
Corporate tax rate on Interest 34% of 11%
Effective Interest rate
Maturity value of deposits
rs 200
Rs 60
2 crore
Rs 12000 lakh
Rs 12000 lakh
11%
3.74%
7.265
12000 lakh (1 + 0.0726)
3
14,808 lakh
Less dividend distribution tax 14,808 lakh x
2042.48 lakh
Amount available for investors
12,765.52 lakh
It is better for company to retain the dividend payout and invest the same in Bank and
distribute after 3 years, as it yields higher return to investors
Q19
d0
g
KE
=
=
=
Current Market price
Q20
Rs 2
5%
10( 1 – 0.3) = 7%
P0
=
Before budget announcement
=
= Rs 42
After Budget announcement
=
= rs 94.50
PRAVINN
MAHAJAN
CA CLASESS
If the company invests Rs 1000 in Market
Pre tax rate of return on investment
Corporate tax rate
Effective rate of return on investment
=
=
=
=
8%
36.75%
8(10.3675)
5.06%
Matured value of deposit
=
=
1000(1.0506)
Rs 1279.93
Dividend payable
=
Rs 1279.93
=
Rs 142.21
=
Rs 1137.72
Less dividend distribution tax
12.5%
Amount available to shareholders
5
1279.93 x
If dividend is distributed Now
Dividend to be distributed
Dividend distribution tax
Rs 1000
1000 x
Rs111.11
Amount available to shareholders
Rs 888.89
Amount invested in bank for 5 years
Rs 888.89
Rate of Interest
Income tax rate for shareholders
Effective ROI
8%
30
8 ( 1 – 0.3)
5.6%
Amount in the hands of investors
888.89(1.056)
Rs 1167.26
PRAVINN
MAHAJAN
CA CLASESS
5
Company should distribute dividend today and shareholder should invest in bank, as it will
increase yield of shareholders
Q21
i.
Statement of Post tax return of A
Amount invested
Rs 100
Dividend paid by co.
Rs 15
Tax on dividend
30%
Rs 4.5
Dividend income after tax
Rs 10.50
Return after tax
ii.
x 100
10.50%
Statement of Post tax return on share of B
Amount invested
Rs 100
Appreciation in value of share
15% p.a ( assumed compounded)
MP of share after 2 years
100(1.15)
Capital gain
Tax on capital gain
30% x 32.25
Capital gain after tax
Return after tax
iii.
2
x 100
Rs 132.25
32.25
Rs 9.675
Rs 22.575
22.575 5 for 2 years i.e 11.2875% p.a
Statement of Post tax return of A (if tax on dividend is 10%)
Amount invested
Rs 100
Dividend paid by co.
Rs 15
Tax on dividend
10%
Rs 1.5
Dividend income after tax
Rs 13.50
Return after tax
x 100
13.50%
Statement of Post tax return on share of B (if tax on capital gains 15%)
Amount invested
Rs 100
Appreciation in value of share
15% p.a ( assumed compounded)
MP of share after 2 years
100(1.15)
Capital gain
Tax on capital gain
15% x 32.25
Capital gain after tax
Return after tax
Q22
x 100
27.4125 % for 2 years i.e 13.706% p.a
=
=
Rs 144.44
Current market price of share is present value of all future dividends.
Co is planning to pay ( 5 x 1.2) Rs 6 per share indefinitely
Current market price
=
=
Q24
Rs 132.25
32.25
Rs 4.8375
Rs 27.4125
Current market price of share is present value of all future dividends. Co is paying Rs 13 per
share indefinitely
Current market price
Q23
2
Rs 30
Current market price of share is present value of all future dividends.
If life expectancy of MD is 20 years, then company will pay dividend of Rs 30 per share
indefinitely from year 21
Current market price
=
=
x 0.149
Rs 44.70
Market Price of share if company pays a dividend of Rs 5 per share indefinitely
Current market price
=
=
Rs 50 per share
Thus if MD’s dividend policy is adopted Value of share is reduced by Rs 5.30 per share
PRAVINN
MAHAJAN
CA CLASESS
Q25
a.
Current market price of share is present value of all future dividends.
P0
=
=
B
i.
=
Rs 30
=
Rs 32.786
Earning Price Model
P0
=
=
If Current market price per share is Rs 35 , share is overvalued
ii
According to PE model
PE
=
=
Current market price
Q26
a.
=
9.524 times
=
=
=
PE x EPS
9.524 x 2.25
Rs 21.429
Growth rate of dividends
4
d5
=
d1 ( 1 + g)
14.03
=
10.7 ( 1 + g )
4
( 1 + g) =
g
b.
=
=
1.0700 – 1
0.07 or 7%
Cost of Equity on old shares
KE
=
+ g
=
=
+ 0.07
19%
PRAVINN
MAHAJAN
CA CLASESS
c.
Cost of equity of new shares
KE
=
+ g
=
+ 0.07
=
Q27
d0
g
Ke
=
=
=
PRAVINN
MAHAJAN
CA CLASESS
19.38 %
Rs 2
5%
15.5%
a. MP If g is 5%
P0
=
=
=
Rs 20
=
Rs 28.8
=
Rs 16.48
b. MP if g is 8%
P0
=
=
c.
MP if g is 3%
P0
=
=
Q28
Growth rate
1 – 2 year
3 – 4 year
th
From 5 year
d0
=
=
=
12%
10%
8%
=
Rs 1.50
r = 16%
Current Market price or intrinsic value of share is Present value of all future dividends
Current market price
= Present value of d1 to d4
=
=
=
+ Present value of P4
1.68 x 0.862 + 1.88 x 0.743
+
x 0.552
+ 2.068 x 0.640 + 2.274 x 0.552
5.42
+
16.94
22.36
(PTO)
st
Price at the end of 1 , 2
Year
Year
nd
rd
th
th
, 3 , 4 , 5 year
1
2
P0
=
22.36
=
P1
=
P1
=
PRAVINN
MAHAJAN
CA CLASESS
24.257
24.257 =
Year 3
P2
=
P2
=
26.25812
Year 4
=
P3
=
P3
=
28.3914
Year 5
Q29
d0
g
r
=
=
=
26.25812
28.3914
=
P4
=
P4
=
30.66
=
P5
=
P0
=
30.66
33.10
3.50
6%
15%
Intrinsic value of share
=
=
Rs 41.222
If Current market price is Rs 50, g is
P0
=
50
=
7.5  50g
=
53.5 g =
g
=
3.5 + 3.5g
4
=
0.0748 or 7.48%
Q30
Growth rate
1 – 2 years
3 – 5 years
6–7
Above 7
10%
12%
12.50%
11%
d0
r
=
=
Rs 5
17.5%
Current market price is present value of all future outflows
Year
1
2
3
4
5
6
7
Dividend / outflow
5.50
6.05
6.776
7.589
8.5
9.5625
10.758
7
Q31
earnings
Shares
KE
i.
= 183.714

factor
0.851
0.724
0.616
0.525
0.446
0.380
0.323
Present value / Price
4.681
4.380
4.174
3.984
3.791
3.634
3.475
0.323
59.340
Current market price
87.459
2.4 lacs
1 lac
12%
PRAVINN
MAHAJAN
CA CLASESS
MP if all earnings are distributed as dividend
PE
=
=
or
CMP
= 8.333 times
=
= Rs 20
ii.
PE
=
8.333
=
Price
=
=
Rs 20
If dividend payout is 50 % and earnings and dividends likely to grow by 8%
CMP
=
=
iii.
8.333 x 2.4
Rs 32.40
Earnings and dividends grow at 10% for 2 years and at 4 % thereafter
Year
1
2
2
Dividend
factor
Present value
2.4 x 1.1 = 2.64
2.904
0.893
0.797
2.358
2.314
= 37.752 0.797
Market price
30.088
34.76
Q32
E0
=
2
Growth rate of EPS
DP ratio
1 – 4 years
20%
25%
5 – 8 years
12%
40%
Above 8 years 6%
50%
th
th
At the end of 8 years PE ratio is 8.5 times, EPS in denominator is of 9 year
i.
Statement of annual EPS and DPS
Year
EPS
1
2.4
2
2.88
3
3.456
4
4.1472
5
4.645
6
5.2024
7
5.827
8
6.526
9
6.918
DPS
0.6
0.72
0.864
1.0368
1.858
2.081
2.331
2.6104
3.459
PRAVINN
MAHAJAN
CA CLASESS
Current market price is PV of all future dividends
th
th
PE (of 8 yr using 9 yr EPS) =
8.5
th
th
th
Price at the end of 8 yr
=
PE (8 yr) x EPS (9 yr)
=
8.5 x 6.918
=
Rs 58.803
Current Market Price
=
Present value of d1  d8 + Present value of MP at the
th
End of 8 year
=
0.6 x 0.877 + 0.72 x 0.769 + 58.803 x 0.351
0.864 x 0.675 + 1.0368 x 0.592
1.858 x 0.519 + 2.081 x 0.456
2.331 x 0.4 + 2.6104 x 0.351
=
=
b.
6.039 + 20.640
Rs 26.68
Expected rate of Return, when stock price is Rs 30
Rate of return will be that rate at which present value of cash outflow (dividend) is equal
to cash inflow (MP) i.e rate at which PV of all dividend is $ 30
Present value of all cash outflows at 14%
=
Present value of cash outflow at 10%
=
0.6 x 0.909 + 0.72 x 0.826 +
0.864 x 0.753 + 1.0368 x 0.683 + 1.858
x 0.620 + 2.081 x 0.564 + 2.331 x 0.513
2.6104 x 0.467 + 58.803 x 0.467
=
Rs 34.70
Expected rate of return is

=
14
=
12.344%
x4
26.68
14%26.68
?  30
10%34.70
For diff of IRR of 4%, change in price is
8.02, for diff in rate of 3.32 Change in
price is 14 
x4
Q33
PE ratio = 7.5
Retained earnings
Rs 3 (37.5%)
Total earnings
i.
= Rs 8 per share
MP
=
=
=
KE
=
PE x EPS
7.5 x 8
Rs 60
ii.
P0
PRAVINN
MAHAJAN
CA CLASESS
+ g
=
=
Div per sh = 8 – 3 = 5
+ 0.12
21.33%
=
=
=
iii.
P0
Rs 67.80
=
=
=
Q34
Rs 191.67
Statement of profit after Tax
Operating Profit
Less Interest on secured loan
Interest on unsecured loan
Profit before tax
Tax
Profit after tax
Number of equity shares
2,50,000
EPS
4
PE ratio (given)
Value of share
Q35
EPS0
DPS0
Current PE
i.
25,00,000
3,75,000
1,25,000
20,00,000
10,00,000
10,00,000
=
=
=
Current MP
P0
12.5
Rs 50
4 x 12.5
Rs 5
Rs 2
7 times
Growth rate
Past 4 years
Future
= 14%
=
=
Estimated PE ratio
=
( 25 lac x 0.15)
(10,00,000 x 0.125)
= Rs 17
=
3.4 times
4%
2%
ii.
Current PE ratio
Current EPS
Actual price in the market
P0
=
35
=
35 (0.14  g)
4.9  35g
37 g
g
Q36
d1
g
RF
r
β
=
=
=
=
=
=
=
7 times
5
7x5 =
Rs 35
2 ( 1 + g)
2 + 2g
2.9
0.0784 or 7.84%
Rs 2 per share
7%
9%
13%
1.5 , likely to increase to 1.75
KE
=
=
=
P0
=
PRAVINN
MAHAJAN
CA CLASESS
R F + β ( R M  R F)
9 + 1.5 (13 – 9)
15%
=
=
Rs 26.75
If β increased to 1.75
KE
=
=
=
P0
=
R F + β ( R M  R F)
9 + 1.75 (13 – 9)
16%
=
=
Q37
RF
=
RM  RF =
β
=
10%
5%
1.6
Growth rate
Rs 23.778
d (2002) = d7
d (1996) = d1
=
=
Rs3
Rs 2.115
6
d7
3
=
=
d1 ( 1 + g )
6
2.115 ( 1 + g)
g
=
 1
=
0.06 or 6%
Cost of Equity
P0
=
=
=
R F + β ( R M  R F)
10 + 1.6 (5 )
18%
PRAVINN
MAHAJAN
CA CLASESS
=
=
=
Q38
i.
ii.
d1
DP ratio
=
=
=
EPS
=
Rs 7
(1 – 0.3)
0.7
= Rs 10
g = b.r
0.06 = 0.3 x r
r
iii.
Rs 26.5
=
= 0.2 or 20%
Value of share
(along with growth
Opportunities)
=
Value of share without
growth opportunities
=
=
175
Vg
Q39
KE
P0
Value of growth opportunities
Value of share without growth
Value of share
(along with growth
Opportunities)
+
=
=
=
100 + Vg
175  100
Rs 75
=
=
=
=
15%
Rs 80 ( after growth)
Rs 20
Rs 80 – Rs 20 =
=
Value of share without
growth opportunities
=
+
60
=
EPS
=
=
60 x 0.15
Rs 9
Earning Price Ratio
=
=
Growth
opportunities
+
Vg
+
Growth
opportunities
+
Vg
Vg
Rs 60
=
80
+
20
=
0.1125
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.