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Problems SAPM

The document contains 6 questions related to stock valuation using the dividend discount model. Each question provides information about a company's dividend history and growth expectations and asks the intrinsic value or maximum price an investor should pay for the stock given a required rate of return.

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Sneha Swamy
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336 views4 pages

Problems SAPM

The document contains 6 questions related to stock valuation using the dividend discount model. Each question provides information about a company's dividend history and growth expectations and asks the intrinsic value or maximum price an investor should pay for the stock given a required rate of return.

Uploaded by

Sneha Swamy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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SAPM QUESTIONS

1. An IT company currently pays a dividend of Rs.5 per share on its equity


shares. The dividend is expected to grow at 6 per cent per year indefinitely.
Stocks with similar risk currently are priced to provide a 12 per cent
expected return. What is the intrinsic value of the stock?
2. Alfa Ltd. Paid a dividend of Rs.2 per share for the current year. A constant
growth in dividend of 10 per cent has been forecast for an indefinite future
period. Investors required rate of return has been estimated to be 15 per cent.
The current market price of the share is Rs.60. Would you buy the share?
3. A company recently paid an annual dividend on its stock of Rs.3 per share.
The dividend is expected to grow at Rs.1 per share for the next four years.
Thereafter, the dividend is expected to grow at 6 per cent per year
indefinitely. The required return on stocks with similar risk is 15 per cent.
What is the intrinsic value of the stock?
4. A Company is expecting to declare a dividend of Rs.3.50 per share during
the next year. Investors forecast a dividend of Rs.4 in the year after that, and
Rs.4.50 in the next year. Thereafter, it is expected that dividends will grow
at 10 per cent per year into an indefinite future. The investors required rate
of return is 20 per cent. What is the maximum price that an investor should
pay for the share?
5. Telstar Ltd. just paid Rs.3.33 as dividend. The company had paid a dividend
of Rs.2.25 eight years ago. What has been the annual growth rate in
dividends during this period? IF the growth rate continues to be the same,
how much will you be willing to pay for a share if you require a return of 12
per cent?
6. Computech Ltd. paid a dividend of Rs.1.50 five years ago and has just paid
an annual dividend of Rs.2.42; you expect dividends to grow at the same
annual rate for the next four years. After that, you expect dividends to grow
at an annual rate of 15 per cent. How much will you be willing to pay for a
share if you require 20 per cent rate of return?
The P/E approach to Equity Valuation: The first step here consists of estimating future earning per share.
Next, the normal price-earnings ratio will be estimated. Product of these two estimates will give the
expected price. For a single year holding period, with D 1 as the referred dividends in the coming year,
the expected return of an investor can be found as under.

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