FINAL EXAMINATION FALL 2021
Managerial Finance 701 Fall 2021
Kazi Dina Laila
Student Id: 21374021
Question 1 A Company has a book value per share of BDT 137.80. Its return on equity is 15% and it follows a policy of
of its earnings. If the opportunity cost of capoital is 18%, what would be price of the share today?
Answer to the question number-01
Solution: Here given, Book value per share, BDT 137.80
Current share price= BDT100
Return on equty, 15%
rs= 18%
g= 60%*15%=9.00%
Earning per share, EPS= book value per share x return on equity= 137.8 *15%
= BDT 20.67
Dividend, D1= (100-60)*EPS=BDT 8.268
So price of the share today= Po= D1/(rs-g)= [8.27/(18%-9%)]= BDT 91.88
Question 2 X Company's current stock price is BDT 36 and its last dividend was BDT 2.40. In view of X strong financia
position and its consequent low risk, its required rate of return is only 12%. If, dividends are expected to g
at a constant rate, g, in the future and if Ks is expected to remain 12% what is X expected stock price five y
Answer to the question number-02
Solution: Here, given
P0 (Current Stock Price) 36
D0 (Last Divident) 2.4
rs (required Rate of Return) 12%
g (Growth Rate) ?
P5 ?
We Know, Po=D0(1+g)/rs-g
so, 36=2.4(1+g)/12%-g
or 36*(.12-g)=2.4+2.4g
or 4.32-36g=2.4+2.4g
or 38.4g=(4.32-2.4)
or g=1.92/38.4
or g=5%
Now P5= Do(1+g)^6/rs-g
2.4(1+.05)^6/(.12-.05)
45.95
So, The X expected stock price five years from now is BDT 45.95
Question 3 Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected to gro
during the next two years, at 13% in the third year, and at a constant rate of 6% thereafter. Computer Chips
was BDT 1.15, and the required rate of return on the stock is 12%.
a. Calculate the value of the stock today.
b. Calculate P1 and P2
c. Calculate the dividend yield and capital gains yield for Years 1, 2 and 3
Solution Answer to the question number-03
Growth RS Dividend
1.15
P0 1 15% 12% 1.32
P1 2 15% 12% 1.52
P2 3 13% 12% 1.72
P3 4 6% 12% 1.82
PV of P5
PV of P0
Y
CG
Total Return
P1= D2+P2/(1+rs)
26.93
P2=(Calculating before P1) D3+P3/(1+rs)
28.64
Y1 D1/Po
5.24%
Y2 D2/P1
5.65%
Y3 D3/P2
6.00%
Capital Gain (1st Year)= (P1-Po)/Po 6.76%
Capital Gain (2st Year)= (P2-P1)/P1 6.35%
Capital Gain (1st Year)= (P3-P2)/P2 6.00%
Ans. (a) The value of the stock today is 25.23
Ans (b) P1 and P2 are 26.93 & 28.64
Ans (c) dividend yield and capital gains yield for Years 1, 2 and 3 are 5.24% (Y1), 5.65% (Y2), 6% (Y3), 6.76%
(CG1), 6.35 (CG2), and 6% (CG3).
Question 4 A firm finances all its investments by 40% debt and 60% equity. The estimated required rate of return on eq
after taxes and that of the debt is 8% after taxes. The firm is considering an investment proposal costing B
an expected return that will last forever. What amount (in BDT) must the proposal yield per year so that the
share does not change? Show calculations to prove your point.
Solution Answer to the question number-04
WACC= WdRd(1 – T) + WcRs
15.20%
So if the investment is
made at 15.20% for
forever, the share price will 6080
not effect and the amount
will be in every year,.
Ans. The amount of BDT 6080 per year with yeild 15.2%
Thank You Sir
15% and it follows a policy of retaining 60%
of the share today?
0. In view of X strong financial
dividends are expected to grow
X expected stock price five years from now ?
BDT 45.95
ividends are expected to grow at a rate of 15%
% thereafter. Computer Chips last dividend
Price Yield Gain Total Return PV of dividend
-44.08 -3.0% 15% 12.0% 1.181
-50.70 -3.0% 15% 12.0% 1.212
-171.86 -1.0% 13% 12.0% 1.223
30.36 6.0% 6% 12.0% 1.158
21.61
25.23
5.24%
6.76%
12.00%
65% (Y2), 6% (Y3), 6.76%
required rate of return on equity is 20%
vestment proposal costing BDT 40,000 with
osal yield per year so that the market price of the
Here,
Wd 40%
Wc 60%
rd (after Tax) 8%
Rs 20%
New Investment 40000
