CORPORATE FINANCE

FUNDAMENTAL VALUATION
CONCEPTS

1
 You have the right to harvest a teak
plantation for the next 20 years over which
you expect to get 100,000 cubic feet of teak
per year.
The current price per cubic feet of teak is
Rs.500, but it is expected to increase at a
rate of 8% p.a. The discount rate is 15%.
What is the present value of the teak that you
can harvest from the teak forest ?

2
 What is the price of a 6 % annual coupon
bond, with a Rs.1,000 face value, which
matures in 3 years? Assume a required
return of 4%.
(a) What is the price of the bond if the required
rate of return is 6 %?
(b) What is the price of the bond if the required
rate of return is 15 %?
(c) What is the price of the bond if the required
rate of return is 4% annually AND the
coupons are paid semi-annually?
3
 What is the price of a 6 % annual coupon bond,
with a Rs.1,000 face value, which matures in 3
years? Assume a required return of 4%.
 1055.5
(a) What is the price of the bond if the required rate of
return is 6 %?
 1000
(b) What is the price of the bond if the required rate of
return is 15 %?
 794.5
(c) What is the price of the bond if the required rate of
return is 4% annually AND the coupons are paid
semi-annually?
 1056.0
4
 Consider an 8 year preference stock
with a par value of Rs 1000. The
required return on the preference stock
is 9%. What is the intrinsic value of the
preference stock ?

5
 Prestige’s equity share is expected to
provide a dividend of Rs. 2.00 and fetch
a price of Rs. 18.00 a year hence. What
price would it sell for now if investor’s
required rate of return is 12%?

6
 The expected dividend per share on the
equity share of Roadking Ltd has grown over
the past 5 years at the rate of 5% per year.
This growth rate will continue in future.

Further, the market price of the equity share

of Roadking Ltd, too, is expected to grow at
the same rate. What is a fair estimate of the
intrinsic value of the equity share of Roadking
Ltd of the required rate of return is 15%?

7
 Ramesh Engineering Ltd is expected to
grow at the rate of 6% p.a. The
dividend expected on Ramesh’s equity
share a year hence is Rs. 2.00. What
price will you put on the share if your
required rate of return is 14%?

8
The current dividend on an equity share of
Vertigo Limited is Rs. 2.00. Vertigo is
expected to enjoy an above-normal growth
rate of 20% for a period of 6 years.

Thereafter the growth rate will fall and stabilize

at 10%. Equity investors require a return of
15%. What is the intrinsic value of the equity
share of Vertigo?

9
The current dividend on an equity share
of International Computers Ltd s Rs.
3.00. The present growth rate is 50%.
However, this will decline linearly over a
period of 10 years and then stabilize
at 12%. What is the intrinsic value per
share of International Computers Ltd,
if investors require a return on 16%?

10
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