Stock valuation Niraj kr.

Timilsina PROBLEM 3
PROBLEM 1 Mahakali Mining Company's ore reserves are being depleted, so its sales
are falling. Also, its pit is getting deeper each year, so its costs are rising.
West Corporation just paid a dividend of Rs. 1.50 a share (i.e., Do = Rs. As a result, the company’s earnings and dividends are declining at the
1.50). The dividend is expected to grow 7 percent a year for the next 3 constant rate of 5 percent per year. If Do = Rs. 5 and ks = 15 %, what is the
years, and then 5 percent a year thereafter. What is the expected dividend value of Mahakali Mining’s stock?
per share for each of the next 5 years?
Solution:
PROBLEM 4
Just paid a dividend (Do) = Rs 1.50
Growth rate (g) = 7% for 3 years Himal Clothiers' stock currently sells for Rs. 20 a share. It just paid a
Growth rate (g) = 5% after 3 years forever dividend of Rs 1 a share (i.e., Do = Rs. 1). The dividend is expected to
grow at a constant rate of 6 percent a year. What stock price is expected 1
Expected dividend for next 5 years= ? year from now? What is the required rate of return?
D1 = Do (1+g) = Rs 1.50(1+ 0.07) = Rs 1.605
P1 = Po(1+g) = Rs 20(1+0.06) = Rs 21.20
D2 = D1 (1+g) = Rs 1.605(1+ 0.07) = Rs 1.7174
D3 = D2 (1+g) = Rs 1.7174(1+ 0.07) = Rs 1.8376 Required return on stock (Ks) = ?
D4 = D3 (1+g) = Rs 1.8376(1+ 0.05) = Rs 1.9295 𝐷1 𝐷1
Po = or Ks = +g
D5 = D4 (1+g) = Rs 1.9295(1+ 0.05) = Rs 2.0260 𝐾𝑠−𝑔 𝑃𝑜
𝐷𝑜(1+𝑔)
Ks = +g
PROBLEM 2 𝑃𝑜
1(1+0.06)
Terai Brothers is expected to pay a Rs. 0.50 per share dividend at the end Ks = + 0.06
of this year (i.e., D1 = Rs. 0.50). The dividend is expected to grow at a 𝑅𝑠 20
constant rate of 7 percent a year. The required rate of return on the stock, Ks = 0.113 or 11.30%
ks, is 15 percent. What is the stock’s current value per share?
Expected dividend (D1) = Rs 0.50 PROBLEM 5
Constant growth rate on dividend (g) = 7% A stock is expected to pay a dividend of Rs 0.50 at the end of the year (that
Required return (Ks) = 15% is D1 = 0.50), and it should continue to grow at a constant rate of 7% a
year. If its required return is 12%, what is the stock’s expected price 4 years
Value of stock (Po) = ?
from today?
𝐷1 𝑅𝑠 0.50
Po = = = Rs 6.25 𝐷1
𝐾𝑠−𝑔 0.15−0.07 Po =
𝐾𝑠−𝑔
𝑅𝑠 0.50
Po =
0.12−0.07
= Rs 10
Again, Ks = Krf + 𝛽(Km – Krf)
= 5.6% + 0.90 × 6%
P4 = Po (1 + 𝑔)4
= 11%
= Rs10 (1 + 0.07)4 𝐷1
Po =
𝐾𝑠−𝑔
= Rs 13.10796
𝑅𝑠 2
Rs 25 =
0.11−𝑔
PROBLEM 6 Rs 2.75-25g = Rs 2
Investors require a 15 percent rate of return on Lumbini Company's stock
(that is, ks = 15%).
Rs 0.75 = 25g
a. What is its value if the previous dividend was Do = Rs.2 and if investors g = 0.03 or 3%
expect dividends to grow at a constant annual rate of (1) - 5 percent (2) 0 Again,
percent, (3) 5 percent, and (4) 10 percent?
P3 = Po (1 + 𝑔)3
b. Using data from Part a, what is the Gordon (constant growth) model
value be if the required rate of return were 15 percent and the expected = Rs25 (1 + 0.03)3
growth rate were (1) 15 percent or (2) 20 percent? Are these reasonable = Rs 27.32
results? Explain.
𝐷1 𝑅𝑠 2(1+0.15) 𝑅𝑠 2.30
Po = = = = undefined PROBLEM 8
𝐾𝑠−𝑔 0.15−0.15 0
𝐷1 𝑅𝑠 2(1+0.20) 𝑅𝑠 2.40 Your broker offers to sell you some shares of Bagmati & Co. common
Po = = = = -Rs 48 which is non sense. stock that paid a dividend of Rs 2 yesterday. Bagmati’s dividend is
𝐾𝑠−𝑔 0.15−0.20 −0.05
expected to grow at a 5 percent per year for the next 3 years. If you buy the
c. Is it reasonable to expect that a constant growth stock would have g>ks?
stock you plan to hold it for 3 years and then sell it. The appropriate
No, it is not reasonable to expect that a constant growth stock would have
discount rate is 12%
g > Ks because if g = Ks, value of stock become undefined and if g > Ks,
a. Find the expected dividend for each of the next 3 years; that is,
stock price becomes negative or N/A.
calculate D1, D2 and D3. Note that Do = Rs.2.
Given:
PROBLEM 7 Past dividend/Current dividend (Do) = Rs 2
You are considering an investment in Kailali Corp’s stock, which is Growth rate (g) = 5% for next 3 years (1 to 3 year)
expected to pay a dividend of Rs. 2 a share at the end of this year (D1 = Rs. a. D1 = ? D2 = ? D3 = ?
2.00) and has a beta of 0.9. The risk free rate is 5.6 percent, and the market Yrs Dividend & price
risk premium is 6 percent. Kailali currently sells for Rs 25 a share, and its 1 D1 = Do(1+g) =2(1+0.05) = Rs 2.10
dividend is expected to grow at some constant rate g. Assuming the market 2 D2 = D1(1+g) =2.10(1+0.0.05) = Rs 2.21
is in equilibrium, what does the market believe will be the stock's price at 3 D3= D2(1+g) =2.21(1+0.0.05) = Rs 2.32
the end of 3 years?
b. Given that the first dividend payment will occur 1 year from f. Is the value of this stock dependent upon how long you plan to
now, find the present value of the dividend stream; that is, hold it? In other words, if your planned holding period were 2
calculate the PV of D1, D2, and D3, and then sum these PVs. years or 5 years rather than 3 years, would this affect the value
Yrs Dividend & price PVIF PV of the stock today? Explain your answer.
12%  The value of the stock is not dependent upon the holding
1 D1 = Do(1+g) =2(1+0.05) = Rs 2.10 0.8929 Rs 1.8750 period. The value of stock is dependent upon cost of equity,
2 D2 = D1(1+g) =2.10(1+0.0.05) = Rs 2.21 0.7972 Rs 1.7618 growth rate of dividend & earning .
3 D3= D2(1+g) =2.21(1+0.0.05) = Rs 2.32 0.7118 Rs 1.6514
TPV Rs 5.2882
Extra :TU 2019BIM/TU 2017:The Nepal Agro Company has just
paid a cash dividend of Rs 20 per share. Investors require a 15 percent
c. You expect the price of the stock 3 years from now to be Rs return. Assume that the dividend is expected to grow at a steady 5
34.73; that is, you expect P3 to equal Rs 34.73. Discounted at a percent per year for ever.
12 percent rate, what is the present value of this expected future
a) What is the current value of the stock?
stock price? In other words, calculate the PV of Rs 34.73.
b) Now suppose that the dividend is expected to grow at 10 percent
Expected P3 = Rs 34.73 per year for the next three years and then settle down to 5 percent
PV of P3 = ? per year, indefinitely. Calculate the value of stock today.
PV of P3 = P3 × PVIF 12%3 Given:
= Rs 34.73 × 0.7118 Just paid dividend (Do) = Rs 20 per share
= Rs 24.7208 Constant growth rate (g) = 5%
Required return (Ks) = 15%
d. If you plan to buy the stock, hold it for 3 years, and then sell it a. Value of stock (Po) = ?
for Rs.34.73, what is the most you should pay for it today? 𝐷1 𝐷𝑜 (1+𝑔)
Value of stock (Po) = =
𝐾𝑠−𝑔 𝐾𝑠−𝑔
The present value of the stock or current stock price: 𝑅𝑠 20 (1+0.05) 𝑅𝑠 21
= = = Rs 210
PV of Po = PV of P3 + PV of dividend stream 0.15−0.05 0.10
= Rs 24.7208 + Rs 5.2882 b. Super growth rate model:
= Rs 30 Growth rate (g) = 10% for the next 3 years
Maximum price you should pay for the stock is Rs 30. Growth rate (g) = 5% constant thereafter (after year 3)
Yrs Dividend & price PVIF PV
e. Calculate the present value of this stock. Assume that g = 5 15%

percent, and it is constant. 1 D1 = Do(1+g) =20(1+0.10) = Rs 22 0.8696 Rs 19.131

2 D2 = D1(1+g) =22(1+0.10) = Rs 24.2 0.7561 Rs 18.298
Present value of stock (Constant growth rate)
𝐷1 2.10 3 D3= D2(1+g) =24.2(1+0.10) = Rs 26.62 0.6575 Rs 17.503
Po = 𝐾𝑠−𝑔 = 0.12−0.05 = Rs 30 3 P3 = Rs 279.51 0.6575 Rs 183.771
PV of Po Rs 238.882
W/N PROBLEM 10
𝐷4 𝐷3 (1+𝑔) 𝑅𝑠 26.62 (1+0.05)
P3 = 𝐾𝑠−𝑔 = = = Rs 279.51 Mechi Corporation is expanding rapidly and currently needs to retain all of
𝐾𝑠−𝑔 0.15−0.05
its earnings; hence, it does not pay dividends. However, investors expect
Mechi to begin paying dividends, beginning with a dividend of Rs.1
PROBLEM 9 coming 3 years from today. The dividend should grow rapidly - at a rate of
Hatiya Enterprises recently paid a dividend, Do, of Rs 1.25. It 50 percent per year during Years 4 and 5. After Year 5, the company should
expects to have non-constant growth of 20% for 2 years grow at a constant rate of 8 percent per year. If the required return on Mechi
followed by a constant rate of 5% thereafter. The firm’s stock is 15 percent, what is the value of the stock today? Ans: Rs. 10.76
required return is 10%. Solution:
a. How far away is the terminal, or horizon, date?
 The terminal or horizon date, in this case, is 2 years. Dividend in year 3 (D3) = Rs 1
Growth rate (g) = 50% for year 4 and 5
b. What is the firm’s horizon, or terminal value? Growth rate (g) = 8% after year 5
𝐷3 𝐷2 (1+𝑔) 𝑅𝑠 1.8 (1+0.05) Required return (Ks) = 15%
P2 = 𝐾𝑠−𝑔 = 𝐾𝑠−𝑔 = 0.10−0.05 = Rs 37.8
Value of stock (Po) = ?
Yrs Dividend & price PVIF 15% PV
c. What is the firm’s intrinsic value today?
3 D3 = 1 0.6575 Rs 0.6575
The firm’s intrinsic value =
4 D4 = D3(1+g)= 1(1+0.50) = Rs 1.50 0.5718 Rs 0.8577
PV of dividend + PV of terminal value
5 D5= D4(1+g)= 1.50(1+0.50) = Rs 2.25 0.4972 Rs 1.1187
Rs 2.8511 + Rs 37.8 × 0.8264
5 P5= Rs 34.71 0.4972 Rs 17.26
Rs 34.08909
Rs 19.89
W/N
Yrs Dividend PVIF PV
W/N
10.% 𝐷6 𝐷5 (1+𝑔) 𝑅𝑠 2.25 (1+0.08)
1 D1 = Do(1+g) =1.25(1+0.20) = Rs 1.50 0.9091 Rs 1.3636 P5 = 𝐾𝑠−𝑔 = = = Rs 34.71
𝐾𝑠−𝑔 0.15−0.08
2 D2 =D1(1+g) =1.50(1+0.20) = Rs 1.8 0.8264 Rs 1.4875
PV of FCF Rs 2.8511 PROBLEM 11
Mahila Cosmetics Co.’s stock price is Rs 58.88, and it recently paid a Rs 2
dividend. This dividend is expected to grow by 25 percent for the next 3
years, then grow forever at a constant rate, g; and Ks = 12%. At what
constant rate is the expected to grow after year 3?
Dividend (Do) = Rs 2
Growth rate (g) = 25% for year (1 to 3)
Growth rate (g) = after year 3 = ?
Required return (Ks) = 12%
Value of stock (Po) = Rs 58.88
 Yrs Dividend & price PVIF PV PROBLEM 13
12% What will be the nominal rate of return on a perpetual preferred stock with
1 D1 = Do(1+g) =2(1+0.25) = Rs 2.50 0.8929 Rs 2.2323 a Rs. 100 par value, a stated dividend of 8 percent of par, and a current
2 D2 = D1(1+g) =2.50(1+0.25) = Rs 3.125 0.7972 Rs 2.4913 market price of (a) Rs. 60, (b) Rs. 80, (c) Rs. 100. and (d) Rs. 140?
3 D3= D2(1+g) =3.125(1+0.25) = Rs 3.906 0.7118 Rs 2.7803
Ans: a.13.3%; b. 10%; c.8%; d. 5.7%
3 P3 = Rs 72.1777 0.7118 ? Rs 51.3761
TPV Rs 58.88 DPS = 8% of Rs 100 = Rs 8
a. If current market price (VPS or Po) = Rs 60
For calculation of g; 𝐷𝑃𝑆 𝑅𝑠 8
KPS = = = 0.1333 or 13.33%
𝐷4 𝐷3 (1+𝑔) 𝑉𝑃𝑆 𝑜𝑟 𝑃𝑜 𝑅𝑠 60
P3 = 𝐾𝑠−𝑔 = 𝐾𝑠−𝑔
𝑅𝑠 3.906 (1+𝑔)
Rs 72.1777 = PROBLEM 14
0.12−𝑔
Rs 8.6613 – Rs 72.1777g = Rs 3.906 + Rs 3.906g Egle Corporation issued preferred stock with a 10% annual dividend. The
Rs 4.7553 = Rs 76.0837g stock currently yields 8%, and its par value is Rs 100.
𝑅𝑠 4.7553
g= a. What is the stocks value?
𝑅𝑠 76.0837
g = 0.0625 or 6.25% b. Suppose interest rate rise and pull the preferred stock’s yield up to
12%. What is its new market value?
PROBLEM 12 Ans: a. Rs 125; b. Rs 83.33
Foksundo Founders has preferred stock outstanding that sells for Rs 60 a PROBLEM 15
share and pays a dividend of Rs 5 at the end of each year. What is the Bagmati Aeronautics has perpetual preferred stock outstanding with a par
required rate of return? value of Rs 100. The stock pays a quarterly dividend of Rs 2, and its current
Solution: price is Rs 80.
Preferred stock selling price (VPS or Po) = Rs 60 a. What is its nominal annual rate of return?
𝐷𝑃𝑆 𝑅𝑠 2
Dividend on preferred stock (DPS) = Rs 5 KPS = = = 0.025 or 2.5%
𝑉𝑃𝑆 𝑅𝑠 80
Required rate of return on prerferred stock (KPS) = ?
The nominal rate of return = (Periodic rate × m)
𝐷𝑃𝑆 𝑅𝑠 5
KPS = = = 0.0833 or 8.33% = (2.5% × 4) = 10%
𝑉𝑃𝑆 𝑅𝑠 60
b. What is its effective annual rate of return?
EAR = (1 + 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒)𝑚 – 1
= (1 + 0.025)4 – 1
= 0.1038 or 10.38%
PROBLEM 16 PROBLEM 18
Sandeep Computer Chips Inc., is experiencing a period of rapid growth. Basyal Industries invests a large sum of money in R & D, and as a result,
Earnings and dividends are expected to grow at a rate of 15 percent during it retains and reinvests all of its earnings. In other words, Basyal does not
the next 2 years, at 13 percent in the third year, and at a constant rate of 6 pay any dividends, and it has no plans to pay dividends in the near future.
percent thereafter. Syangja's last dividend was Rs.1.15, and the required A major pension fund is interested in purchasing Basyal’s stock. The
rate of return on the stock is 12 percent. pension fund manager has estimated Basyal’s free cash flows for the next
a. Calculate the value of the stock today. 4 years as follows: Rs 3 million, Rs 6 million, Rs 10 million, and Rs 15
million. After the 4 year, free cash flow is projected to grow at a constant
b. Calculate P1 and P2. 7 percent. Basyal’s WACC is 12 percent, its debt and preferred stock total
C. Calculate the dividend yield and capital gains yield for Years 1,2, and 3. to Rs 60 million, and it has 10 million shares of common stock outstanding.
Ans: a. Rs 25.23; b. Rs 26.93 and Rs 28.64; c. dividend yield = 5.24%,5.65% & a. What is the present value of free cash flows projected during the next
6%; capital gains yield = 6.74%; 6.35%; and 6%. 4 years?
The present value of Basyal’s free cash flows during next 4 years
Yrs FCF (in million) PVIF 12.% PV
PROBLEM 17
1 Rs 3 0.8929 Rs 2.6787
Smith Technologies is expected to generate Rs 150 million in free cash 2 Rs 6 0.7972 Rs 4.7832
flow next year, and FCF is expected to grow at a constant rate of 5% per 3 Rs 10 0.7118 Rs 7.1180
year indefinitely. Smith has no debt or preferred stock, and its WACC of 4 Rs 15 0.6355 Rs 9.5325
10%. If smith has 50 million shares of stock outstanding, what is the stock’s Total PV of FCF Rs 24.1124
value per share?
Solution: b. What is the firm’s terminal value?
𝐹𝐶𝐹𝑛 (1+𝑔) 𝑅𝑠 15 (1+0.07)
𝐹𝐶𝐹1 𝑅𝑠 150 Terminal value = 𝑊𝐴𝐶𝐶−𝑔 = 0.12−0.07 = Rs 321 million
Value of company = 𝑊𝐴𝐶𝐶−𝑔 = 0.10−0.05 = Rs 3000 million
Value of company = Value of equity (because company has no debt or
preferred stock)
c. What is the firm’s total value today?
𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
Stock price per share = Value of firm today = Total PV of FCF + PV of terminal value
𝑁𝑜.𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒 = Rs 24.1124 + Rs 321 × PVIF 12%4
𝑅𝑠 3000 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
= = Rs 60 per share = Rs 24.1124 + Rs 321 × 0.6355
50 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
= Rs 24.1124 + Rs 204
= Rs 228.11 million

d. What is an estimate of Basyal’s price per share?

Value of equity = Value of firm – Value of debt
= Rs 228.11 million – 60 million
= Rs 168.11 million
 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
Price per share = Stock price per share =
𝑁𝑜.𝑜𝑓 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑁𝑜.𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒
𝑅𝑠 168.11 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑅𝑠 7000 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
= = Rs 16.811 = = Rs 35 per share
10 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 200 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

PROBLEM 19 PROBLEM 20
Assume that today is December 31, 2016, and that the following Dang Corporation is a fast-growing supplier of office products. Analysts
information applies to Vermeil Airlines: project the following free cash flows (FCFS) during the next 3 years, after
 After tax operating income EBIT (1-T) for 2017 is expected to be which FCF is expected to grow at a constant 7% rate. Dang's weighted
Rs 500 million. average cost of capital is 13%.
 The depreciation expenses for 2017 is expected to be Rs 100 Time 1 2 3
million.
 The capital expenditure for 2017 are expected to be Rs 200 million. FCF (Rs millions) -Rs 20 Rs 30 Rs 40
 No change is expected in net working capital.
 The free cash flow is expected to grow at a constant rate of 6 percent a. What is Dang's terminal, or horizon, value? (Hint: Find the value
per year. of all free cash flows) beyond Year 3 discounted back to Year 3)
 The required return on equity is 14 percent. 𝐹𝐶𝐹𝑛 (1+𝑔) 𝑅𝑠 40 (1+0.07)
 The WACC is 10 percent. Terminal value = 𝑊𝐴𝐶𝐶−𝑔
= 0.13−0.07
= Rs 713.33 million
 The market value of company’s debt is Rs 3 billion. b. What is the firm’s value today?
 200 million shares of stock are outstanding.
Using corporate valuation model approach, what should be the stock Yrs FCF (in million) PVIF 13.% PV
price today? 1 - Rs 20 0.8850 - Rs 17.7
2 Rs 30 0.7831 Rs 23.493
Solution: 3 Rs 40 0.6931 Rs 27.724
Operating cash flow = Net operating profit after tax + Depreciation Total PV of FCF Rs 33.517
= Rs 500 million + Rs 100 million
= Rs 600 million Value of firm today = Total PV of FCF + PV of terminal value
Free cash flow (FCF) = Operating cash flow – Capital expenditure = Rs 33.517 + Rs 713.33 × PVIF 13%3
= Rs 600 million – Rs 200 million = Rs 33.517 + Rs 713.33 × 0.6931
= Rs 400 million = Rs 33.517 + Rs 494.4095
𝐹𝐶𝐹1 𝑅𝑠 400 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
= Rs 527.926 million
Value of company = 𝑊𝐴𝐶𝐶−𝑔 = = Rs 10,000 million c. Suppose Dang has Rs 100 in debt, and 10 million shares of stock.
0.10−0.06
What is your estimate of the current price per share?
Value of equity = Value of company – Value of debt
Value of common equity = Total value of firm – value of debt
= Rs 10,000 million – Rs 3,000 million = Rs 527.926 – Rs 100
= Rs 7,000 million = Rs 427.926
 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 Yrs Dividend & price PVIF 15% PV
Intrinsic price per share =
𝑁𝑜.𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒 1 D1 = Rs 12.544 0.8696 Rs 10.908
𝑅𝑠 427.926 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 2 D2 = Rs 13.80 0.7561 Rs 10.434
= = Rs 42.789
10 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 2 P2= Rs 144.883 0.7561 Rs 109.546
PV of P1 Rs 130.89
EXTRA PROBLEM
For P2
1) Arun Company is experiencing a period of rapid growth. Earnings
dividends are expected to grow at a rate of 12 percent during the Yrs Dividend & price PVIF 15% PV
next 2 years, at 10 percent in the third year, and at a constant rate 1 D1 = Rs 13.80 0.8696 Rs 12
of 5 percent thereafter. Company’s last dividend was Rs 10, and the 1 P1 = Rs 144.883 0.8696 Rs 126
required rate of return on the stock is 15 percent. PV of P2 Rs 138
a) Calculate the value of the stock today.
b) Calculate P1 and P2. c. Capital gain and Dividend gain yield:
c) Calculate the dividend yield and capital yield for year 1,2 and 3.
Yr Total yield Dividend Yield CG Yield
Solution: (Ks) (Total yield-Div. yield)
Given: 1 15% 𝐷1 𝑅𝑠 11.2
= 123.559 = 9.06% 5.94%
Last dividend (Do) = Rs 10 𝑃𝑜
2 15% 𝐷2 𝑅𝑠 12.544
Growth rate (g) = 12% for next 2 years (1 to 2 year) = = 9.58% 5.42%
𝑃1 130.89
Growth rate (g) = 10% for year 3 3 15% 𝐷3 𝑅𝑠 13.80 5%
= = 10%
Growth rate (g) = 5% constant after year 3 𝑃2 138

Required return (Ks) = 15%

a. Value of stock (Po) = ?

Yrs Dividend & price PVIF PV
15%
1 D1 = Do(1+g) =10(1+0.12) = Rs 11.2 0.8696 Rs 9.740
2 D2 = D1(1+g) =11.2(1+0.12) =Rs 12.544 0.7561 Rs 9.485
3 D3=D2(1+g)=12.544(1+0.10)=Rs 13.80 0.6575 Rs 9.074
3 P3 = Rs 144.883 0.6575 Rs 95.261
PV of Po Rs 123.559
W/N
𝐷4 𝐷3 (1+𝑔) 𝑅𝑠 13.80 (1+0.05)
P3 = 𝐾𝑠−𝑔 = = = Rs 144.883
𝐾𝑠−𝑔 0.15−0.05
b. Calculation of P1 and P2
For P1