Mr. Anand is thinking of buying a Share at 500 whose Face Value per share is 100. He is expecting a bonus at the ratio 1 : 5 at the end of the…

CA Intermediate · Financial Management and Strategic Management · MTP · September 2024
Mr. Anand is thinking of buying a Share at 500 whose Face Value per share is 100. He is expecting a bonus at the ratio 1 : 5 at the end of 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. Assuming a Discount rate of 12% per annum, COMPUTE the Net Present Value from the acquisition of the shares.

Suggested Answer and Working Notes:

Computation of PV of Future Cash Flows Year Nature Cash Flow DF @ 12% DCF 1 Dividends (₹ 100 × 20%) 20 0.893 17.86 2 Dividends (₹ 100 × 20%) 20 0.797 15.94 3 Dividends (₹ 100 × 20%) 20 0.712 14.24 4 Dividends (₹ 100 × 20%) 20 0.636 12.72 5 Dividends (₹ 100 × 1.2 × 20%) 24 0.567 13.61 6 Dividends (₹ 100 × 1.2 × 20%) 24 0.507 12.17 7 Dividends (₹ 100 × 1.2 × 20%) 24 0.452 10.85 7 Net Sale Proceeds (₹ 900 × 1.2 – 5%) 1,026 0.452 463.75 Present Value of Cash Inflows 561.14 0 Less: Initial Investment (₹ 500 + 5%) 525 1 525.00 Net Present Value 36.14 Note: At the end of Year 4, Anand will have 1.2 Share i.e. 1 Bought Share + 1/5th Bonus Share.

Topics: Part-A: Financial Management

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