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‘Scanned with CamScannerWhen the Dividend is Growing at Variable Rate
The present value of equity share can be calculated with variable dividend rate by usin
following method. : ty
Problem 1:
A company is expected to pay a dividend of % 5 per share after a year. Its dividends
expected to grow at 14 per cent for next five years and then at the rate of 7 per cent indefining?
Find out the present value of the share if the capitalization rate is 11 per cent. 4
Answer:
Ist step: Calculate the present value of dividend
2nd step: Find out the present value of equity share at the end of 6th year with constant grove
in dividend
3rd Step: Find the present value of equity share today.
Step 1:
Present Value of Dividends
_
Years Dividend () [Pv tactor@ 11% Present value (%)
1 5 0.900 4.50
2 5+ (5 x 14) = 5.70 0.811 4.62
3 5.70 + (8.70 * .14) = 6.50 0.731 4.75
4 6.50 + (6.5 x 14) = 7.40 0.659 4.88
5 7.40 + (7.40 * .14) = 8.40 0.593 4.98
6 8.40 + (8.40 = .14) = 9.58 0.535 5.13
eT 28.85
Step 2:
7
The likely dividend for the 7th year = [9.58 + 9.58 x Too! = 10.25
D 10.25
aa ==: 256.25
d-g «11 -.07
Value of the equity share at the end of 6th year =
Present value of the equity share today = 256,25 (.535) = 137
Step 3:
Present value of the equity today = 137 + 28.85
Including earlier dividend = 166
Problem 2:
‘A company is currently paying a dividend of € 4 per share. The dividend is expected to rot
at 16 per cent annual rate for five years and then at 114 per cent for ever, What is the present val
of the share if the capitalization rate is 14 per cent,
‘Scanned with CamScannerJanswer:
yy 1: Caleulation of present value of dividend
Ste}
Years | Expected dividend? PV factor@14% PV of Dividend (%)
1 4+ (4 x 16) = 64 0.877 4,06
= 4.64
2 4.64 + (4.64 * .16) = .74 0.769 4.14
= 5.38
3 5.38 + (5.38 x .16) = 86 0.675 r 4.24
= 6.24
4 6.24 + (6.24 .16) = 1.00 0.592 4.29
= 7.24
5 7.24 + (7.24 * 16) = 1.15 0.519 4.36
= 8.40
21.05
Step 2:
ae ofthe s D 0+ (40x11) 932
‘alue of the share at tl = = 311
al he he end of Sthe year= Gg = 14-1 “3 73
Step 3:
Present value of the equity share today = [311 * .519] = 161
Present value of the equity share today including the earlier dividend = 161 + 21.05 = 182
Problem 3:
‘A company is expected to pay a dividend of % 6.00 per share after a year. Its dividends are
expected to grow at 14 per cent for next five years and then at the rate of 9 per cent for ever. Find
out the present value of its share, if the capitalization rate 13 per cent.
Answer:
Step 1:
Present Value of Dividends
Dividend PF factor@13% Present value &
6 0.885 5.31
6 + 6(.14) = .84 = 6.84 0.783 5.36
6.84 + 6.84 (.14) = 95 = 7.79 0.693 5.40
7.79 + 7.79(.14) = 1.90 = 8.79 0.613 5.39
8.79 + 8.79(.14) = 1.23 = 10.00 0.543 5.43
10.00 + 10.00(.14) 11.40 0.480 5.47
32.36
‘Scanned with CamScannerStep 2:
Calculation of the dividend for the 7th year
11.40 + 11.40(.09) = 11.40 + 1,02 = 12.43
‘The value of the share at the end of the 6th year
D, 1243 _ 124
d-g .13-.09 0.04
310.75
The present value of the share = 310.75 (480) = 149
Step 3:
The value the equity share today = 149 + 32.36 = 182
‘Scanned with CamScannerEARNINGS CAPITALIZATION MODEL
Under this model the earnings ‘nade by the company will be capitalized at a particular perceny,
;
returns. The formula is
E
PVESH=
Where,
PVESH = Present value of equity shares
E = Earnings per share
d = Capitalization rate
Problem 1:
Calculate the price of the equity share according to earnings capitalization approach wis
earnings per share is € 22 with the capitalization rate of 13 per cent.
Answer:
Problem 2:
Calculate the present value of equity share of a company earns & 1,00,000 to be distribu
amongst 10,000 shareholders with a capitalization rate of of 12 per cent.
Answer:
100.000 9
PVESH = — = —10,000_ = ~~ = 83
qd 12
‘Scanned with CamScannerproblem 3:
Calculate the present value of equity share if the earings of a company is % 25.00 per share
with the capitalization rate of 14 per cent,
Answer:
4
PVESH = = 77 = 179
‘Scanned with CamScanner