INVESTMENT QUESTIONS

Question 1

Year 0 1 2 3 4
Dividend ($) 4.8 4.8 4.8 4.8
Liquidating Dividend 40
($)
Total Dividend ($) 4.8 4.8 4.8 44.8
Discount Rate 12%
Discount Factor 0.893 0.797 0.712 0.636
Present Value ($) 4.286 3.827 3.417 28.471
Net Present Value ($) 40

The current value of the companys stock is $40 per share.

Question 3
Value of Stock P = D0 (1+g)t/(1+r)t = D0 (r)t
Where D0 = Current Dividend (or Future expected dividends)
g = dividend growth rate
r = discount rate
t = time in years
r = (1+g)/(1+r) = 1.05/1.1 = 0.9545
Hence, P = $1.75 * (0.9545)t = $1.75 (0.9545 + 0.95452 + .+0.9545t)
P5 = $1.75 (0.9545+.+0.95455) = $1.75 (4.3575) = $7.6257
P10 = $1.75 (0.9545+.+0.954510) = $1.75 (7.8099) = $13.6673
P30 = $1.75 (0.9545+.+0.954530) = $1.75 (15.7895) = $27.6316
P100 = $1.75 (0.9545+.+0.9545100) = $1.75 (20.7788) = $36.3629

Question 5
Value of Stock P = D0 (1+g)t/(1+r)t = D0 (r)t
Where D0 = Current Dividend (or Future expected dividends)
g = dividend growth rate
r = discount rate
t = time in years
At 20% growth rate, r = (1+g)/(1+r) = 1.2/1.11 = 1.0811
At 12% growth rate, r = (1+g)/(1+r) = 1.12/1.11 = 1.009
At 6% growth rate, r = (1+g)/(1+r) = 1.06/1.11 = 0.955
At 0% growth rate, r = (1+g)/(1+r) = 1/1.11 = 0.9009
At -5% growth rate, r = (1+g)/(1+r) = 0.95/1.11 = 0.8559

Hence, P = $1.75 * (1.0811)t = $1.75 (1.0811 + 1.08112 + .+ 1.0811t)

At 20% growth rate, P = $5 (1.0811+.+1.081125) = $5 (80.2924) = $401.4622
At 12% growth rate, P = $5 (1.009+.+1.00925) = $5 (28.1503) = $140.7516
At 6% growth rate, P = $5 (0.955+.+0.95525) = $5 (14.5026) = $72.5129
At 0% growth rate, P = $5 (0.9009+.+0.900925) = $5 (8.4217) = $42.1087
At -5% growth rate, P = $5 (0.8559+.+0.855925) = $5 (5.8163) = $29.0813

Question 7
For Perpetual dividends, Value of Stock P = D1/(r-g)
Where D1 = Expected dividend at the end of 1st year
g = dividend growth rate
r = discount rate
Hence, r = g + D1/P
r = 0.045 + 4.35/70 = 0.1071
Discount rate would be 10.71%

Question 9
For Perpetual dividends, Value of Stock P = D1/(r-g)
Where D1 = Expected dividend at the end of 1st year
g = dividend growth rate
r = discount rate
Hence, D1 = P (r-g)
D1 = $83 (0.09 0.045) = $83 (0.045) = $3.735
D3 = D1 (1+g)2 = $3.735 (1 + 0.045)2 = $4.0787

Question 11
Given,
Sustainable Growth Rate SGR = 6%
ROE = 17%
Dividends per share D = $1.65
P/E Ratio = 19
We know that SGR = ROE (1 Dividend Payout Ratio)
So, 6% = 17% * (1 Dividend Payout Ratio)
Therefore, (1 Dividend Payout Ratio) = 0.3529
Dividend Payout Ratio = 1 0.3529 = 0.6471
i.e. Dividend/Earnings = 0.6471
Hence, Earnings E = Dividend/0.6471 = $1.65/0.6471 = $2.55 per share
P/E = 19
P = 19 * E = 19 * $2.55 = $48.45
The current stock price is $48.45

NINTENDO CASE STUDY

1. What did Nintendo do to differentiate itself from the competitors?

To differentiate itself from its well-established competitors, namely Sony and Microsoft,
Nintendo decided to change the game itself than be better and faster. For it to compete
with Sony and Microsoft on conventional rules would mean to invest huge sums of
money in developing bigger, faster, and more powerful consoles, and to later support it
with extravagant expenditures to capture the same mind space of the customer. Rather, it
focused on building a new space, a blue ocean, for itself by introducing the concept of
Player Interaction. Newer technology enabling users to feel more involved and to
experience virtual reality in its first form was focused upon, which put Nintendo on a
different pedestal in terms of console gaming, all the while keeping the costs low.
Furthermore, to establish itself in the market, the company used innovative advertising
and promotional strategy to capture a wider audience than the traditional user base of
children and teenagers.

2. Which positioning strategy seems to have been used?

Nintendo has used a couple of positioning strategies, as outlined below:

Positioning Strategy based on Use or Application: Although the end Use of Wii
was to play video games, the manner of use of the same would change drastically
post the introduction of the product. Earlier, the customers and the target segments
of the Gaming Consoles industry were tuned to playing video games with corded
remotes having buttons and keys for specific purposes. With Wii, the users had
the convenience of a wireless remote that would interact with them by means of
their actions, and would help them interact with the game itself through Virtual
Reality. As correctly depicted by Wiis advertisements, it gave the users the
opportunity to experience a new way to play..
Positioning Strategy based on Product Process: This strategy of positioning
specifically focuses on the association of the product with its users or class of
users, something that Nintendo sought to overhaul with the introduction of Wii.
Where the conventional gaming consoles targeted the children and the teenagers,
the usual consumers of the gaming industry, Wii was positioned to target a wider
range of audience. This spectrum of newfound target segments would include
everyone from Children to Grandparents in a family. The company tried to
establish this positioning in its target segments by depicting the benefits, notably
exertainment, to its new target market segments. While it enhanced its
desirability in the conventional segments by change in the interaction process of
game playing, it expanded its market by positioning the benefits to the middle
aged and older demographic segments.