NUMERICAL ON EQUITY VALUATION
1. The equity stock of Rax Limited is currently selling for Rs.30 per share. The dividend
expected next year is Rs.2. The investors’ required rate of return on this stock is 15%. If
the constant growth model applies to Rax Limited, what is the expected growth rate?
2. Vardhman Limited’s earnings and dividends have been growing at a rate of 18% per
annum. This growth rate is expected to continue for 4 years. After that the growth rate
will fall to 12% for the next 4 years. Thereafter, the growth rate is expected to be 6%
forever. If the last dividend per share was Rs.2 and the investors’ required rate of return
on Vardhman’s equity is 15%, what is the intrinsic value per share?
3. The current dividend on an equity share of Pioneer Technology is Rs.3. Pioneer is
expected to enjoy an above-normal growth rate of 40% for 5 years. Thereafter, the
growth rate will fall and stabilise at 12%. Equity investors require a return of 15% from
Pioneer’s stock. What is the intrinsic value of the equity share of Pioneer?
4. An investor wants to invest in the equity shares of XYZ Ltd. for one year. The company
is expected to declare a dividend of Rs. 2 per share at the year end. Further a leading
security analyst has projected the year end target price of this company’s shares as
Rs.120. Do you think the stock is a good buy at a price of Rs.100 now. Assume that the
required rate of return is 10%
5. A firm had paid dividend at Rs 2 per share last year. The estimated growth of the
dividends from the company is estimated to be 5% p.a. Determine the estimated market
price of the equity share if the estimated growth rate of dividends (i) rises to 8% and (il)
falls to 3%. Also find out the present market price of the share, given that the required
rate of return of the equity investors is 15.5%.
6. A large sized chemical company has been expected to grow at 14% per year for the next
4 years and then to grow indefinitely at the same rate as the national economy, i.e., 5%.
The required rate of return on the equity shares is 12%. Assume that the company paid a
dividend of Rs 2 per share for last year (D. = 2). Determine the market price of the shares
today.
7. A company is likely to grow at a rate of 2% in first year, 3% in next two years, and then
at 6% per annum thereafter. The company recently paid ₹10 as dividend. If the rate of
return expected from the company of similar business risk class is 8%, what is the
appropriate price of the shares of this company?
8. Calculate the value of equity share from the following :
Equity Share Capital ( 20 each) Rs 50,00,000
Reserves and Surplus Rs 5,00,000
15% Secured Loans Rs 25,00,000
12.5% Unsecured Loans Rs 10,00,000
Fixed Assets Rs 30,00,000
Investments Rs 5,00,000
Operating Profit Rs 25,00,000
Tax Rate 30%
P/E Ratio (Price-Earnings) 12.5
9. An investor has invested his savings in a company from whom dividends are expected to
grow @ 20% for 15 years and thereafter @ 7% forever. Find out the value of the equity
share given that the current dividend per share is Rs 1 and the required rate of return of
the investor is 9%.
10. A firm pays a dividend of Rs 1.50 with a growth rate at 7%. The risk-free rate, IR, is 9%
and the market rate of return, kM, is 13%. Presently, the firm has a beta factor (β) of 1.50.
However, due to a decision of the finance manager, β is likely to increase to 1.75. Find
out the present as well as the likely value of the share after the decision.
