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    Fin552 Topic 5 Homework Exercises

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    Hardy Mercurial
    The document contains 3 homework exercises related to company analysis and valuation models. Exercise 1 calculates dividends and share value using the dividend discount model. Exercise 2 calculates a PE multiplier based on financial information. Exercise 3 values a share using the dividend discount model, calculating dividends growing at different rates into perpetuity, and compares the calculated value to the current market price.

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    Fin552 Topic 5 Homework Exercises

    Uploaded by

    Hardy Mercurial
    1K views3 pages
    The document contains 3 homework exercises related to company analysis and valuation models. Exercise 1 calculates dividends and share value using the dividend discount model. Exercise 2 calculates a PE multiplier based on financial information. Exercise 3 values a share using the dividend discount model, calculating dividends growing at different rates into perpetuity, and compares the calculated value to the current market price.

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    FIN552 TOPIC 5 HOMEWORK EXERCISES

    Original Title

    FIN552 TOPIC 5 HOMEWORK EXERCISES

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    The document contains 3 homework exercises related to company analysis and valuation models. Exercise 1 calculates dividends and share value using the dividend discount model. Exercise 2 calculates a PE multiplier based on financial information. Exercise 3 values a share using the dividend discount model, calculating dividends growing at different rates into perpetuity, and compares the calculated value to the current market price.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views3 pages

    Fin552 Topic 5 Homework Exercises

    Uploaded by

    Hardy Mercurial
    The document contains 3 homework exercises related to company analysis and valuation models. Exercise 1 calculates dividends and share value using the dividend discount model. Exercise 2 calculates a PE multiplier based on financial information. Exercise 3 values a share using the dividend discount model, calculating dividends growing at different rates into perpetuity, and compares the calculated value to the current market price.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    TOPIC 5 HOMEWORK EXERCISES

    EXERCISE 1: JUNE 2019 (Dividend Discount Model)

    Question 3

    a) Tribeda Corporation has just paid a dividend of RM1.20 per share. The dividend is
    expected to grow at 6 percent a year for the next three years, and then to grow at 8
    percent a year thereafter.

    i) Compute the expected dividend per share for the next six years. (3 marks)

    D1 = D0(1+g) D2 = D1(1+g) D3 = D2(1+g)


    = 1.20(1.06) = 1.272(1.06) = 1.3483(1.06)
    = 1.2720 = 1.3483 = 1.4292

    D4 = D3(1+g) D5 = D4(1+g) D6 = D5(1+g)


    = 1.4292(1.08) = 1.5435(1.08) = 1.6670(1.08)
    = 1.5435 = 1.6670 = 1.8004

    ii) If the required rate of return is 14 percent, compute the value of the share today.
    (5 marks)

    SP3 = V3 = D4 / (k-g) = 1.5435 / (0.14-0.08)


    = RM25.73

    D1 D2 D3 V3
    V0 = 1 + 3 +
    +
    (1−k ) (1−k ) (1−k ) (1−k )3
    2

    1.2720 1.3483 1.4292 25.73


    = 1 + 3 +
    +
    (1.14) (1.14) (1.14) (1.14)3
    2

    = RM20.48
    EXERCISE 2: DECEMBER 2019 (The Earning multiplier (PE) Model)

    Question 3

    a) PE multiplier is the most widely used multiplier in valuation, as earning power is


    the primary driver of investment value. The following is the information on a
    technology company. Compute the PE Multiplier based on the given information.

    Earnings Per Share RM0.50


    Sales RM7 million
    Total Asset Turnover 1.5 times
    Number of Stocks Outstanding 1 million units
    Dividend Per Share RM0.30
    Equity Multiplier 2 times
    Expected Return 10 percent

    a) Earning after taxes (EAT) or NI = EPS x NOSO


    = 0.50 X 1,000,000
    = 500,000

    b) Net profit margin (NPM) = NI ÷ Sales


    = (500,000 ÷ 7,000,000) x 100%
    =

    c) Dividend Payout = (0.30 ÷ 0.50) x 100


    = 60%

    d) Earning retention rate = 1-0.6


    = 0.4

    e) Growth rate = 0.4 x ROE


    ROE = 500,000 ÷ (0.5 x 1,000,000)
    =1
    Growth rate = 0.4 x 1
    = 0.4

    f) P/E = 0.6 ÷ (0.1 – 0.4)


    = -2

    h) IV = -2 x 0.50
    = -1
    EXERCISE 3: TEST 1 (SEMESTER MAR-AUG 2021)

    Question 2 (Topic 5: Company Analysis and Valuation)

    a) You are optimistic on the future growth of Jucha Food Tech Bhd where you expect
    it to grow at 4 percent for the next two years. The growth is estimated to be 6 percent
    in the third and fourth year, and a constant rate of 8 percent thereafter. Jucha’s last
    reported earnings was RM3.60 per share, and dividend payout is 50 percent.

    i) If your required rate of return is 12 percent, determine the value of the share.

    D1 = D0(1+g) D2 = D1(1+g) D3 = D2(1+g)


    = 1.80(1.04) = 1.8720 (1.04) = 1.9469 (1.06)
    = 1.8720 = 1.9469 = 2.0637

    D4 = D3(1+g) D5 = D4(1+g)
    = 2.0637 (1.06) = 2.1875 (1.08)
    = 2.1875 = 2.3625

    V3 = 2.3625 ÷ (0.12 – 0.08)


    = 59.0625

    V0 = 1.872 ÷ (1.12)1 + 1.9469 ÷ (1.12)2 + 2.0637 ÷ (1.12)3 + 2.1875 ÷ (1.12)4 +


    59.0625 ÷ (1.12)4

    = 43.6179

    ii) If Jucha’s share is traded at RM46.80, would you consider buying it? Justify your
    answer.

    Do not buy because it is overvalued.

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