Kamalpokhari, KTM, Nepal

www.hcm.edu.np
Master of Business Administration (MBA)
February intake 2019
Semester IV

Assignment of
Financial Risk Mangement

Submitted By Submitted To
Dikchhya Tamrakar Himalayan College of Management
MBA 4th Sem Kamalpokhari ,Ktm.

FINC 5602/Sept 2020

INSTRUCTIONS:

Sharma & Sharma Company is favorite company of stock market investors over a
decade. The company has distributed a constant 50% dividend in last 20 decade to its
investors. But in near future company has expected that it will face a massive fall in
sales due to adverse economic situation in the country. The decline in sales will result
the decline in profit of company for next 5 year. The company has forecasted the
following earning per share (EPS) for the upcoming 5 years.
Year 1 Rs. 30/Share
Year 2 Rs. 25/Share,
Year 3 Rs. 20/Share
Year 4 Rs. 15/Share
Year 5 Rs. 15/Share

After year 5 the company will maintain the EPS at a level of Rs. 25 each year with
10% growth forever.
The company is following the dividend policy of 50% of its earning (i.e. DPS =
EPS*50%).

You as a stock analyst/investor is analyzing/looking at the above financial of Sharma

and Sharma company. You are borrowing some investment fund to invest in the stocks
of this company at a market interest rate of 12% per annum (i.e. required rate of
return).

If Sharma and Sharma is trading at market price of Rs. 300 per share at stock market.
What will you do with your investment decision of this company in this market price if
you value this stock with dividend discount valuation method?

(Hint: V0 = D1/(1+kS)¹+ D2/(1+kS)²+…….+ (Dn+Vn)/(1+kS)ˆn)

FINC 5602/Sept 2020

Solution,
Here Given,
Required rate of return (ks) = 12% p.a.
Market Price per Share (MPS) = Rs 300
For First five year Dividend is distributed by 50% of earning which is calculated
below:-
Year EPS DPS (=EPS *50%)
1. 30 15
2. 25 12.5
3. 20 10
4. 15 7.5
5. 15 7.5
6. 25 12.5

As company will follow constant growth rate of 10% forever beyond 5 years .So
calculation of value of stock end is calculated below:-

V6 = D5 (1+ g)
Ks - g

= (25*50%) (1+ 0.10)

0.12-0.10

= 12.5* 1.10
0.02

= 687.5

Lets calculate the intrinsic value :-

V0 = D1 + D2 + D3 + D4 + D5 + P6
1 2 3 4
(1 + ks) (1 + ks) (1 + ks) (1 + ks) (1 + ks) (1 + ks)6
5

= 15 + 12.5 + 10 + 7.5 + 7.5 + 687.5

(1 + 0.12)1 (1 + 0.12)2 (1 + 0.12)3 (1 +0.12)4 (1 + 0.12)5 (1 + 0.12)6

= 15 + 12.5 + 10 + 7.5 + 7.5 + 687.5

1.12 1.2544 1.405 1.575 1.7623 1.97

= 13.39 + 9.968 + 7.119 + 4.768 + 4.255 + 348.36

= 387.80

FINC 5602/Sept 2020

Market price of the share is Rs 300 and Value of intrinsic share is Rs 387.80 , Its
seems to be under valued than market price . Therefore it si better to purchased the
share.

FINC 5602/Sept 2020