An investor is holding 1,000 shares of X Ltd., Current Year dividend rate is 3 per share. Market price of the share is 35 each. The investor is…

CA Final · Advanced Financial Management · PYQS · May 2024
An investor is holding 1,000 shares of X Ltd., Current Year dividend rate is 3 per share. Market price of the share is 35 each. The investor is concerned about several factors which are likely to change during the next financial year as indicated below: Particulars Current Year Next Financial Year Dividend paid / anticipated per share (₹) 3.00 3.25 Risk Free Rate 11% 12% Market Risk Premium 4% 5% Beta Value 1.5 1.6 Expected growth 8% 10% Advise the investor to take further action, whether to BUY, HOLD or SELL the shares, based on the above information.

Suggested Answer and Working Notes:

On the basis of existing and revised factors, rate of return and price of share is to be calculated. Existing rate of return = R f + Beta (R m - R f ) = 11% + 1.5 (4%) = 17.00% Revised rate of return = 12% + 1.6 (5%) = 20.00% Price of share (original) P O = D (1 + g) / (K e - g) = 3 (1.08) / (0.17 - 0.08) = 3.24 / 0.09 = 36.00 Price of share (Revised) P O = 3.25 (1.10) / (0.20 - 0.10) = 3.575 / 0.10 = 35.75 Advice- As the existing market price of the share is 35, Current Equilibrium Price of the share 36and Revised Price - 35.75 are almost equal. Under this situation investor should hold the share.

Topics: Security Valuation

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