QUESTION NO.2A (Exam Question) Compute: (a) (b) (c) QUESTION NO.4A (i) (ii) (iii) QUESTION NO.5A (Exam Question)(8 Marks) Years

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1 1 QUESTION NO.2A(Exam Question)A share of T Ltd. is quoted at a price-earning ratio of 7.5 times. The retained earning per share being 37.5% is Rs. 3 per share. Compute: (a)the company's cost of equity if investors expect annual growth rate of 12% (b)if anticipated growth rate is 13% p.a.,calculate indicated market price with same cost of equity. (c) If the company's Cost of Equity is 18% and anticipated growth rate is 15% p.a., calculate the market price per share, assuming other conditions remain the same. QUESTION NO.4A Tata is to pay dividend of Rs at the end of the year and it is expected to grow at 11.2% p.a, and Cost Of Equity is 15.2% per annum, (i) What is its intrinsic value i.e Po as on today? (ii) What is the next years expected price at the end of Year 1? (iii) If an investor wants to buy Tata stock now and sell it after receiving Rs dividend a year from now, what is the expected capital gain in % terms? What is the dividend yield and what is the holding period return? QUESTION NO.5A(Exam Question)(8 Marks)- Z Ltd. will have a growth rate of 12% per annum in the next 2 years. The growth rate is likely to fall to 10% for the third year and fourth year. After that the growth rate is expected to stabilize at 8% p.a forever. If dividend paid was Rs per share and the investors required rate of return is 16%, find out the intrinsic or Fair value i.e Po per share of Z Ltd. as of date i.e as on today.you may use the following table: Years Discounting Factor at 16% QUESTION NO.6A(Exam Question)The Beta Co-efficient of Target Ltd. is 1.4. The company has been maintaining 8% rate of growth in dividends and earnings. The last dividend paid was Rs. 4 per share. Return on Government securities is10%.return on market portfolio is 15%. The current market price of one share of Target Ltd. is Rs. 36. What will be the equilibrium or fair price per share of Target Ltd. Would you advice purchasing the share? QUESTION NO.7 Arvind has invested in Gujarat Chemicals. The capitalisation rate of the company is 15 % and the current dividend i.e Do is Rs. 2 per share. Calculate the price of the company s equity share if the company is slowly declining with an annual decline rate of 5% in the dividend. QUESTION NO. 8 (Study Material)(Exam Question) Piyush Ltd presently pay a dividend of Re per share and has a share price of Rs (i) If this dividend were expected to grow at a rate of 12% per annum forever, what is the firm s expected or required Cost Of Equity using a dividend-discount model approach? (ii) Instead of this situation in part (i), suppose that dividend were expected to grow at a rate of 20% p.a. for 5 years and 10% per year thereafter. Now what is the firm s expected, or Cost Of Equity? [Ans:18.82%(approx)][Hint at 15% NPV= & at 20% NPV = ]

2 2 QUESTION NO.9(Exam Question)A Ltd. has a book value per share of Rs Its return on equity is 15% and it follow a policy of retaining 60% of its earnings. If the opportunity Cost Of Equity is 18%, what is price of share today as per Perpetual Growth Model? QUESTION NO.10A If Current MPS of the Company as per its existing policy is Rs. 10 and its has 1,00,000 shares outstanding.now Company is undertaking an investment which is giving a positive NPV of Rs. 2,00,000.What should be the revised MPS? QUESTION NO.11(Study Material)(Exam Question)With the help of following figures calculate the market price of a share of a company by using Dividend Growth Model (Gordon's Formula) Earning Per Share (EPS) Rs. 10 Dividend Per Share (DPS) Rs. 6 Cost of Equity (K) 20% Internal Rate of Return on Investment 25% Retention Ratio 40% QUESTION NO.12 The dividends paid by a company over the last few years are as follows Year DPS (Rs.) Estimate the growth rate? QUESTION NO.13A(6 Marks)(Exam Question) Following Financial data are available for PQR Ltd. for the year ending 2008 (Rs. In lakh) Debentures 125 bonds (2007) 50 Equity shares (Rs. 10 each) 100 Reserve and Surplus 300 Total Assets 600 Assets Turnovers ratio 1.1 Interest rate of Debenture & Bond 8% Tax rate 40% Current market Price of Shares 14 Required Rate of return of investors (Ke) 15% Operating Profit Margin 10% Dividend payout ratio for the year ending 2008 (Do) 16.67% You are required to: (i)draw income statement for the year

3 (ii)calculate its growth rate (iii)calculate the fair price of the company s shares using dividend discount model,and (iv)what is your opinion on investment in the company s share at current price? 3 QUESTION NO.15(Exam Question) Mr. A is contemplating purchase of equity shares of a Company. His expectation of return is 10% before tax by way of dividend with an annual growth of 5%. Company s last dividend was Rs. 2 per share. Even as he is contemplating, Mr. A suddenly finds, due to a budget announcement dividends have been exempted from tax in hands of the shareholders(recipients).but the imposition of Dividend Distribution Tax(Corporate Dividend Tax) on the Company is likely to lead to a fall in dividend of 20 paise per share. A s marginal tax rate is 30%. Calculate what should be Mr. A s estimates of price per share before and after Budget announcement? QUESTION NO.17A(RTP)Z Co. is a watch manufacturing company and is all equity financed and has paid up capital Rs.10,00,000 (Rs.10 per shares) The other data related to the company is as follows: Year EPS (Rs.) Dividend Per Share (Rs.) Share Price (Rs.) Z Co. has hired one management consultant, Vidal Consultants about the future earnings and other related item for the forthcoming years. As per Vidal Consultants s report (1) The earnings and dividend will grow at 25% for the next two years. (2) Earnings are likely at rate of 10% from 3rd year and onwards. (3) Further if there is reduction in earnings growth occurs dividend payout ratio will increase to 50%.Calculate the estimated share price and Current P/E Ratio (taking Fair Po calculated by you and given current EPS) which analysts now expect for Z Co., using the dividend valuation model. You may further assume that cost of equity is 18%. QUESTION NO.19A(6 Marks)(Exam Question) On the basis of the following information : Current dividend (Do) = Rs.2.50 ; Discount rate (k) = 10.5% ; Growth rate (g) = 2% (i) Calculate the present value of stock of ABC Ltd. (ii) Is this stock overvalued if stock price is Rs.35, ROE = 9% and Current EPS = Rs.2.25 Show your calculations under the PE Multiple approach [Taking Current EPS] and Earning Growth model [ assume given EPS is of Year 0 ][ assume ROE to be Ke ]

4 4 QUESTION NO.20A(RTP) X Ltd., just declared a dividend of Rs per share.mr. A is planning to purchase the share of X Ltd. because he is of the opinion that growth rate will increase to 8% for next three years. Further, he expects to sell the share at Rs.400 at year end 3.You are required to determine: (a)calculate Fair Price Per Share, if he requires a rate of return of 12%. (b)calculate Fair Price Per Share if he is of the opinion that the 8% growth rate can be maintained indefinitely and require 12% return? (c)suppose that 8% growth rate is achieved with 12% rate of return, what will be price of share at the end of 3 years.(i.e Calculate P3) QUESTION NO.21(8 Marks)SAM Ltd. has just paid a dividend of Rs. 2 per share and it is expected to 6% p. a. After paying dividend, the Board declared to take up a project by retaining the next three annual dividends. It is expected that this project is of same risk as the existing projects. The results of this project will start coming from the 4 th year onward from now. The dividends will then be Rs per share and will 7% p. a. An investor has 1,000 shares in SAM Ltd. and wants a receipt of atleast Rs. 2,000 p.a. from this investment. (a)show that the market value of the share is affected by the decision of the Board. (b)also show as to how the investor can maintain his target receipt from the investment for first 3 years and improved income thereafter, given that the cost of capital of the firm is 8%. QUESTION NO.22A(Exam Question)(6 Marks) Sahu & Co. earns Rs. 6 per share having capitalization rate of 10 % and has a return on investment at the rate of 20 %. (i) According to Walter s Model, what should be the price per share at 30 % dividend payout ratio? (ii) Is this the optimum payout ratio as per Walter?

CA - FINAL SECURITY VALUATION. FCA, CFA L3 Candidate

CA - FINAL SECURITY VALUATION. FCA, CFA L3 Candidate CA - FINAL SECURITY VALUATION FCA, CFA L3 Candidate 2.1 Security Valuation Study Session 2 LOS 1 : Introduction Note: Total Earnings mean Earnings available to equity share holders Income Statement