Prepared by: Muhammad Umar Munir

Share Valuation

IMPORTANT FORMULAE:
Dividend discount
model:
(Gordon model)
Components of expected
return:

P0

DIV0 (1 g )
E1 (1 b)
DIV1
OR P0
OR P0
rg
rg
rg

DIV1
g
P0

r Dividend yield Growth rate (Capital gain yield )

Growth rate:

g ROE retention ratio OR g

GROWTH RATE:
Following are the data related to Jax Ltd:
YEAR 1992 1993 1994 1995 1996
EPS
2.00 2.16 2.33 2.52 2.72
Calculate growth rate.

1997
2.94

1998
3.18

1999
3.43

n 1

EPS n
1
EPS 0

2000
3.70

2001
4.00

GROWTH RATE:
YEAR
1
2
DIVIDENDS 1.0700 1.1449
Calculate expected growth rate.

3
1.2250

BASICS:
1. DPS CALCULATION:
MegaCity Ltd has just paid dividend of Rs.1.5 per share. The dividend is expected to grow
5% for next three years and 10% thereafter for ever. Calculate expected dividends for next
five years.
2. CONSTANT GROWTH VALUATION:
Thomas Brothers is expected to pay dividend per share of 50 paisa next year. Dividend is
expected to grow at a constant rate of 7%. Calculate price of a share assuming require rate of
return is 15%.
[Answer: Rs.6.25]

3. CONSTANT GROWTH VALUATION:

Share of Haris Ltd is selling for Rs.20 per share. The stock has just paid a dividend of Rs.1
per share. This dividend is expected to grow at a constant rate of 10%. Calculate the
expected price of the stock after a year and required return on the stock.
[Answer: Rs.22, and 15.5%]

4. PREFERRED STOCK VALUATION:

FeeNest Ltd has preferred stock outstanding which pays dividend of Rs.5 per share. The
required rate of return on this stock is 8.33%. Calculate the price of preferred stock.
[Answer: Rs.60]

5. SUPERNORMAL GROWTH VALUATION:

A company currently pays a dividend of rupees two per share. It is estimated that the
companys dividend will grow at the rate of twenty percent for the next two years, and
thereafter at the rate of seven percent for ever. The company stock has a required rate of
twelve point three percent. At what price would you like to purchase the stock?
[Answer: Rs.50.5]

6. GROWTH RATE:
Current market price of X Ltds share is Rs.80. the stock is expected to have a year end
dividend per share of Rs.4/-. Required rate of return is 14%. Calculate the constant growth
rate.
-1-

Prepared by: Muhammad Umar Munir

Share Valuation
[Answer: 9%]

7. DECLINING RATE:
UNZ Ltd is facing considerable financial difficulties. As a result, the earnings and dividends
are falling at a constant annual rate of 5%. If required rate of return is 15% and current
dividend is Rs.5, calculate the market price of the share.
[Answer: Rs.23.75]

CONSTANT GROWTH VALUATION GORDON MODEL:

1. Rachel Gill is considering buying stock of MCT which is expected to pay an annual dividend
of Rs.5.877 next year. Dividends are expected to grow at 5.90% forever. Rachel Gill
proposes to hold the stock for the next couple of years and then sell it at fair market price. If
the required return is 13.37%, what should Rachel Gill pay for the stock?
[Answer: Rs.78.6747]

2. Wang Corp is expected to pay a dividend of Rs.1.068 next quarter. Dividends are expected
to grow at an annual growth rate of 5.50% compounded every quarter forever. If investors
require an annual return of 14.36% compounded every quarter on Wang Corp's stock, what
should the price of the stock be?
[Answer: Rs.48.2167]

3. Analysts' forecasts indicate that John Beere will pay a dividend of Rs.5.628 next year. You
expect the dividends to grow at 5.20% forever. What should you pay for the stock if you plan
to hold it for 6 years and then sell it at fair market price? Assume that the required rate of
return is 14.25%?
[Answer: Rs.62.18785]

GROWTH RATE:
1. SuperCard's stock has experienced a steady growth in its annual dividend. The last dividend
paid was Rs.4.95 per share. If shares of SuperCard are currently selling for Rs.50.09, and
the required rate of return on the stock is 16.19%, estimate the growth in dividends
experienced by SuperCard? This is also the capital gains yield on the stock.
[Answer: 5.74%]

2. Earth Mover has just paid a dividend of Rs.5.55. Investors require a return of 16.93% from
Earth Mover's stock. What constant growth rate in dividends (capital gains yield) would be
required for Earth Mover's stock to sell for Rs.49.73?
[Answer: 5.1905%]

3. Stock in IBP is selling for Rs.57.90 per share. IBP just paid a dividend of Rs.4.60 per share,
and the required return on similar stocks is 12.36%. Assuming that IBP's dividends will grow
at a constant rate in the future. Estimate the growth rate.
[Answer: 4.09%]

4. Micromedia have experienced a steady growth in its annual dividend. The next dividend is
expected to be Rs.5.500 per share. If shares of Micromedia are currently selling for
Rs.75.76, and the required rate of return on the stock is 12.03%, estimate the rate of growth
in dividends experienced by Micromedia? This is also the capital gains yield on the stock.
[Answer: 4.77%]

5. SS Publishing is expected to pay a dividend of Rs.4.677 next year. Investors require an

annual return of 16.06% from SS Publishing's stock. What constant growth rate in dividends
(capital gains yield) would be required for SS Publishing's stock to sell for Rs.38.56?
[Answer: 3.93%]

TEST YOUR SKILLS:

1. Analysts' forecasts indicate that World Travel will pay a quarterly dividend of Rs.0.864 next
period. They expect dividends to grow at an annual rate of growth of 4.76% compounded
every quarter forever. What should the price of World Travel's stock be if investors require an
annual return of 17.64% compounded quarterly?
2. Zachery Gomez plans to buy United Food stock that just paid a dividend of Rs.4.50. The
dividend is expected to grow at 9.62% for the next 2 years. At that point in time Zachery
Gomez proposes to sell the stock for Rs.61.03. If the required return on United Food's stock
is 14.57%, at what price should United Food's stock be selling today?
-2-