XY Ltd., paid a dividend of 3for the current year. The dividend is expected to grow at 30% for the next 5 years and at 15% per annum thereafter. The…
CA Final · Advanced Financial Management · PYQS · May 2024
XY Ltd., paid a dividend of 3for the current year. The dividend is expected to grow at 30% for the next 5 years and at 15% per annum thereafter. The return on 182 days T-bills is 12% per annum and the market return is expected to be around 16% with a variance of 24%. The Co-Variance of XY's return with that of the market return* is 30%. You are required to: (i) Calculate the Required Rate of Return (ii) Calculate the Intrinsic Value of the Stock The PVF at 17% is given below: Year 1 2 3 4 5 PVF (17%) 0.855 0.731 0.624 0.534 0.456 * In question paper mistakenly, return got typed as value.
Suggested Answer and Working Notes:
(i) β = Covariance of Market Return and Security Return / Variance of Market Return β = 30% / 20% = 1.25 Required Rate of Return = R f + β(R m - R f ) = 12% + 1.25(16% - 12%) = 12% + 5.00% = 17.00% (ii) Intrinsic Value Year Dividend (₹) PVF (17%,n) Present Value (₹) 1 3.90 0.855 3.33 2 5.07 0.731 3.71 3 6.59 0.624 4.11 4 8.57 0.534 4.58 5 11.14 0.456 5.08 20.81 PV of Terminal Value = (11.14 x 1.15) / (0.17 - 0.15) × 0.456 = 292.09 Intrinsic Value = 20.81 +292.09 = 312.90
Topics: Security Valuation
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