3 - Valuation of Equity Shares - Assignment (26-04-19)
3 - Valuation of Equity Shares - Assignment (26-04-19)
(1) A company has a book value per share of ` 137.80. Its return on equity is 15%
and it follows a policy of retaining 60% of its earnings. If the Opportunity Cost of
Capital is 18%, what is the price of the share today?
(2) MNP Ltd. has declared and paid annual dividend of ` 4 per share. It is
expected to grow @ 20% for the next two years and 10% thereafter. The required
rate of return of equity investors is 15%. Compute the current price at which
equity shares should sell.
Note: Present Value Interest Factor (PVIF) @ 15%:
For year 1 = 0.8696;
For year 2 = 0.7561
(4) X Limited, just declared a dividend of ` 14.00 per share. Mr. B is planning to
purchase the share of X Limited, anticipating increase in growth rate from 8% to
9%, which will continue for three years. He also expects the market price of this
share to be ` 360.00 after three years.
(5) ABC Ltd. has been maintaining a growth rate of 10 percent in dividends. The
company has paid dividend @ `3 per share. The rate of return on market portfolio
is 12 percent and the risk free rate of return in the market has been observed as 8
percent. The Beta co-efficient of company’s share is 1.5.
You are required to calculate the expected rate of return on company’s shares as
per CAPM model and equilibrium price per share by dividend growth model.
(7) A share of Tension-free Economy Ltd. is currently quoted at, a price earnings
ratio of 7.5 times. The retained earnings per share being 37.5% is ` 3 per share.
Compute:
(1) The company’s cost of equity, if investors expect annual growth rate of 12%.
(2) If anticipated growth rate is 13% p.a., calculate the indicated market price,
with same cost of capital.
(3) If the company’s cost of capital is 18% and anticipated growth rate is 15%
p.a., calculate the market price per share, assuming other conditions remain
the same.
(8) Following Financial data are available for PQR Ltd. for the year 2008:
(` in lakh)
8% debentures 125
10% bonds (2007) 50
Equity shares (` 10 each) 100
Reserves and Surplus 300
Total Assets 600
Assets Turnovers ratio 1.1
(9) Mr. A is thinking of buying shares at ` 500 each having face value of ` 100. He
is expecting a bonus at the ratio of 1:5 during the fourth year. Annual expected
dividend is 20% and the same rate is expected to be maintained on the expanded
capital base. He intends to sell the shares at the end of seventh year at an
expected price of ` 900 each. Incidental expenses for purchase and sale of
shares are estimated to be 5% of the market price. He expects a minimum return
of 12% per annum.
Should Mr. A buy the share? If so, what maximum price should he pay for each
share? Assume no tax on dividend income and capital gain.
(10) ABC Limited’s shares are currently selling at ` 13 per share. There are
10,00,000 shares outstanding. The firm is planning to raise ` 20 lakhs to Finance
a new project.
Required:
What are the ex-right price of shares and the value of a right, if
(i) The firm offers one right share for every two shares held.
(ii) The firm offers one right share for every four shares held.
(iii)How does the shareholders’ wealth change from (i) to (ii)? How does right
issue increases shareholders’ wealth?
(11) Pragya Limited has issued 75,000 equity shares of ` 10 each. The current
market price per share is ` 24. The company has a plan to make a rights issue of
one new equity share at a price of ` 16 for every four share held.
You are required to:
(i) Calculate the theoretical post-rights price per share;
(ii) Calculate the theoretical value of the right alone;
(iii)Show the effect of the rights issue on the wealth of a shareholder, who has
1,000 shares assuming he sells the entire rights; and
(iv)Show the effect, if the same shareholder does not take any action and ignores
the issue.
(12) XYZ company has current earnings of ` 3 per share with 5,00,000 shares
outstanding. The company plans to issue 40,000, 7% convertible preference
shares of ` 50 each at par. The preference shares are convertible into 2 shares for
each preference shares held. The equity share has a current market price of ` 21
per share.
(i) What is preference share’s conversion value?
(ii) What is conversion premium?
(iii) Assuming that total earnings remain the same, calculate the effect of the
issue on the basic earning per share (a) before conversion (b) after
conversion.
(iv) If profits after tax increases by ` 1 million what will be the basic EPS (a)
before conversion and (b) on a fully diluted basis?