TOPIC 5 HOMEWORK EXERCISES

EXERCISE 1: JUNE 2019 (Dividend Discount Model)

Question 3

a) Tribeda Corporation has just paid a dividend of RM1.20 per share. The dividend is
expected to grow at 6 percent a year for the next three years, and then to grow at 8
percent a year thereafter.

i) Compute the expected dividend per share for the next six years. (3 marks)

D1 = D0(1+g) D2 = D1(1+g) D3 = D2(1+g)

= 1.20(1.06) = 1.272(1.06) = 1.3483(1.06)
= 1.2720 = 1.3483 = 1.4292

D4 = D3(1+g) D5 = D4(1+g) D6 = D5(1+g)

= 1.4292(1.08) = 1.5435(1.08) = 1.6670(1.08)
= 1.5435 = 1.6670 = 1.8004

ii) If the required rate of return is 14 percent, compute the value of the share today.
(5 marks)

SP3 = V3 = D4 / (k-g) = 1.5435 / (0.14-0.08)

= RM25.73

D1 D2 D3 V3
V0 = 1 + 3 +
+
(1−k ) (1−k ) (1−k ) (1−k )3
2

1.2720 1.3483 1.4292 25.73

= 1 + 3 +
+
(1.14) (1.14) (1.14) (1.14)3
2

= RM20.48
EXERCISE 2: DECEMBER 2019 (The Earning multiplier (PE) Model)

Question 3

a) PE multiplier is the most widely used multiplier in valuation, as earning power is

the primary driver of investment value. The following is the information on a
technology company. Compute the PE Multiplier based on the given information.

Earnings Per Share RM0.50

Sales RM7 million
Total Asset Turnover 1.5 times
Number of Stocks Outstanding 1 million units
Dividend Per Share RM0.30
Equity Multiplier 2 times
Expected Return 10 percent

a) Earning after taxes (EAT) or NI = EPS x NOSO

= 0.50 X 1,000,000
= 500,000

b) Net profit margin (NPM) = NI ÷ Sales

= (500,000 ÷ 7,000,000) x 100%
=

c) Dividend Payout = (0.30 ÷ 0.50) x 100

= 60%

d) Earning retention rate = 1-0.6

= 0.4

e) Growth rate = 0.4 x ROE

ROE = 500,000 ÷ (0.5 x 1,000,000)
=1
Growth rate = 0.4 x 1
= 0.4

f) P/E = 0.6 ÷ (0.1 – 0.4)

= -2

h) IV = -2 x 0.50
= -1
EXERCISE 3: TEST 1 (SEMESTER MAR-AUG 2021)

Question 2 (Topic 5: Company Analysis and Valuation)

a) You are optimistic on the future growth of Jucha Food Tech Bhd where you expect
it to grow at 4 percent for the next two years. The growth is estimated to be 6 percent
in the third and fourth year, and a constant rate of 8 percent thereafter. Jucha’s last
reported earnings was RM3.60 per share, and dividend payout is 50 percent.

i) If your required rate of return is 12 percent, determine the value of the share.

D1 = D0(1+g) D2 = D1(1+g) D3 = D2(1+g)

= 1.80(1.04) = 1.8720 (1.04) = 1.9469 (1.06)
= 1.8720 = 1.9469 = 2.0637

D4 = D3(1+g) D5 = D4(1+g)
= 2.0637 (1.06) = 2.1875 (1.08)
= 2.1875 = 2.3625

V3 = 2.3625 ÷ (0.12 – 0.08)

= 59.0625

V0 = 1.872 ÷ (1.12)1 + 1.9469 ÷ (1.12)2 + 2.0637 ÷ (1.12)3 + 2.1875 ÷ (1.12)4 +

59.0625 ÷ (1.12)4

= 43.6179

ii) If Jucha’s share is traded at RM46.80, would you consider buying it? Justify your
answer.

Do not buy because it is overvalued.