1. Ashok wants to buy watchful companies stock and hold on it for 5 years. He estimates that rupees 3.

44
dividend would be paid by the company continuously for next 5 years. He hopes to sell the shares at
rupees 60 at the end of 5th year, what is the present price? If required rate of return is 10%.

S0 = 3.44/(1.1)1 +3.44/(1.1)2+3.44/(1.1)3 +3.44/(1.1)4 +3.44/(1.1)5+60/(1.1)5

=3.1273+2.843+2.5845+2.35+2.136+37.2553
=50.2961

2. Antique arts company would pay rupees 2.50 as dividend per share for the next year and expected to
grow indefinitely at 12% what would be the equity value of the investors require 20% return?

Solution : So = Do(1+g)/K – g =2.50(1+0.12)/0.20-0.12=2.8/0.08=35

3. Anil Has brought the Everest company stock that has paid rupees 3 as dividend per share during the
last financial year. Pets two situation either a 5% decline in the dividend or 5% growth in the dividend in
the next year. Anticipated return is 20%. Fix the Price for both the situation.

(a) 5% Decline –
So = Do(1+g)/K – g = 3(1-0.05)/0.20+0.05=2.85/0.25=11.4

(b) 5% growth –
So = Do(1+g)/K – g == 3(1+0.05)/0.20-0.05=3.15/0.15=21

4. Returns of ABC Company at present s 21% assume to continue for the next 5 years and after that it is
assume to have a growth rate of 10% indefinitely. The dividend paid for the year 2019-20 is 32 percent.
the required rate of return is 20% present price is rupees 57.what is the estimated price according to two
stage model.
Do =3.2 , g(1-5)=21%, g(1-∞)=10%,n=5,k=0.20

D1=3.2(1.21)1 , D1=3.2(1.21)2 ,D1=3.2(1.21)3, D1=3.2(1.21)4, D1=3.2(1.21)5

3.872, 4.68512, 5.6690, 6.8595, 8.3

V1 =3.872/(1.2)1 +4.68512/(1.2)2+5.6690/(1.2)3+6.8595/(1.2)4+8.3/(1.2)5

V1 =3.2267+3.2536+3.2980+3.3080+3.3356=16.4219

V2 =DN (1+g)/(k-g)(1+k)N

=8.3(1.10)/(0.20-0.10)(1.2)5 =9.13 / 0.2488=36.69

V1 + V2 =16.4219+36.69=53.1119
5. The common stock of bulls corporation is currently selling for rupees 70 per share. Dividend per share
has grown from rupees to 2 the current level of rupees 6 over the past 10 years and dividend growth is
expected to continue in the future. What is the required rate of return of the bull’s corporation?

So = Do(1+g)/K – g
G = future value/ present value)1/n – 1
G= (6/2)1/10 – 1=1.1161-1=0.116 %
K= Do(1+g)/So + g
6(1.116)/70+0.116 =0.0955

6. Determine the intrinsic value of an equity share given the following data:
Last dividend rupees 2
Growth rate for the next five years 15%
Growth rate beyond 5 years 10%
Assume required rate of return.

Apply two stage model for your calculation.

7. The commonwealth corporations earnings and dividends have been growing at the rate of 12% per
annum. This growth rate is expected to continue for 4 years. After that the growth rate would fall to 8%
for the next 4 years. Beyond that the growth rate is expected to be 5% forever. The last dividend was
rupees 1.50 the investors required rate of return on the stock of commonwealth is 14% how much should
be the market value per share of commonwealth corporations equity stock?

The common wealth corporation market value per share can be calculated in three stages –

Step 1:
D1 = 1.50(1+0.12)1 =1.68
2
D2 =1.50(1.12) =1.8816
D3 =1.50(1.12)3 =2.1074
4
D4 =1.50(1.12) =2.3603
D5 =1.50(1.12) 4(1.08)1 =2.5491
D6 =1.50(1.12) 4(1.08)2 =2.7530
D7 =1.50(1.12) 4(1.08)3 =2.9733
D8 =1.50(1.12) 4(1.08)4 =3.2111

PV stream = 1.68(PVIF14%,1year )+ 1.8816(PVIF14%,2year )+ 2.1074(PVIF14%,3year )+ 2.3603(PVIF14%,4year )+

2.5491(PVIF14%,5year )+ 2.7530(PVIF14%,6year )+ 2.9733(PVIF14%,7year )+ 3.2111(PVIF14%,8year )

=1.68(0.870)+ 1.8816(0.758)+ 2.1074( 0.661)+ 2.3603(0.577 )+ 2.5491(0.505)+ 2.7530(0.442)+ 2.9733(

0.388)+ 3.2111(0.340)

1.47336 1.44695 1.422495 1.397298 1.322983 1.252615 1.186347 1.127096

= 10.62914
Step 2: price of the share at the end of 8 years , applying constant growth model
1.127096 (1.12) 4(1.08)4 (1.05)/ 0.14-0.05 =28.1498

Present value is 28.1498/1.14 8 =9.8681

Sum of the above : 10.62914+9.8681 =20.4973

8.the current dividend on an equity share of Pioneer technology is rupees 3 expected to enjoy and above
normal growth rate of 40% for five years. there after the growth rate will fall and stabilize at 12% .equity
investor requires a rate of return of 15% from Pioneer stock what is the intrinsic value of equity share of
Pioneer?