SEMESTER FALL 2023

Corporate Finance (FIN622)

ASSIGNMENT

Due Date: November 14, 2023, Total Marks: 10

Learning Outcome:
To help students understand stock valuation by the Dividend Discount Model (DDM)
Scenario
Stock valuation is an important concept in financial management since it serves as the
foundation for sound decision-making. It is believed that stock valuation is an combination of
science and art that depends on the data. Financial specialists have access to many evaluation
techniques, such as the Dividend Discount Model (DDM), Discounted Cash Flow Model
(DCF), and Price/Earnings-to-Growth (PEG) Ratio which are useful tools for choosing quality
stocks for investments. The Dividend Discount Model (DDM), in addition to other methods of
valuation, is the most often used approach because of its clear empirical support and ease of
use.
The Dividend Discount Model (DDM) is based on factors such as dividends, investors'
expected returns, and dividend growth, which offers a solid foundation for conducting
valuations and making comparisons. Within the framework of the DDM approach, stock
valuation involves assessing a company's stock and then contrasting this valuation with the
prevailing market price to determine whether the stock is trading at a premium or discount.
Assume you are a financial manager, and management has delegated to you the job of valuing
several stocks from banking sector. The management 's goal is to determine the intrinsic value
of each stock to create a portfolio for future investment. The management has provided the
following data of recently paid dividends of each bank. United Bank Ltd. (UBL) paid a recent
dividend of Rs. 16.2; while Bank Alfalah Ltd. (BAFL) paid Rs. 3.0. However, MCB Bank
Ltd. (MCB) paid a recent dividend of Rs. 4.2 while Faysal Bank Ltd.( FABL) paid Rs. 7.5 and
paid out everything as dividends.
United Bank Bank Alfalah Faysal Bank MCB Bank
Ltd. (UBL) Ltd. (BAFL) Ltd. (FABL) Ltd. (MCB)

Current price 166.4 40.4 24.5 35.5

Recently paid. 16.2 3.0 7.5 4.2
Dividend (Rs.)
Growth rate (%) 4% 5% 0% 10%
Required return. 8% 9% 7% 8%
(%)

Requirement:
a) What would be the value of United Bank Ltd. (UBL) stock now and in four years (2+2)
b) What would be the value of Alfalah Ltd. (BAFL) stock after four years (3)
c) What would be the value of Faysal Bank Ltd. (FABL) stock (2)
d) If the growth of MCB Bank Ltd. (MCB) stock is 10%, What would be the value after two
years by Dividend Discount Model (1).
Important Instructions:
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solution.
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