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The document outlines common stockholder rights, intrinsic value models, and capital budgeting processes. It details various stock valuation methods, including the Discounted Dividend Model and Corporate Valuation Model, as well as project analysis using NPV, IRR, and MIRR. The analysis concludes with project selection criteria based on NPV and IRR at different WACC levels.

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2 views4 pages

Deep Seek

The document outlines common stockholder rights, intrinsic value models, and capital budgeting processes. It details various stock valuation methods, including the Discounted Dividend Model and Corporate Valuation Model, as well as project analysis using NPV, IRR, and MIRR. The analysis concludes with project selection criteria based on NPV and IRR at different WACC levels.

Uploaded by

lamiasalahuddin93
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Q10.

(i) Common Stockholder Rights

1. Voting rights (elect board of directors)

2. Dividend rights (share in profits when declared)

3. Residual claim (assets in liquidation after creditors)

4. Preemptive rights (right to maintain proportional ownership)

5. Information rights (access to financial reports)

6. Right to sue for wrongful acts

Q10. (ii) Intrinsic Value and Models

Intrinsic value: True underlying value based on company's fundamentals, distinct from market price

Discounted Dividend Model:

 Values stock as present value of all future dividends

 Formula: P<sub>0</sub> = Σ D<sub>t</sub>/(1+r)<sup>t</sup>

 Best for mature, dividend-paying companies

Constant Growth Model (Gordon Growth):

 Special case of DDM assuming constant dividend growth

 Formula: P<sub>0</sub> = D<sub>1</sub>/(r - g)

 Where D<sub>1</sub> = next year's dividend, r = required return, g = growth rate

Q11. (i) Corporate Valuation vs DDM

Corporate Valuation Model is preferred when:

 Company doesn't pay dividends

 Dividends aren't representative of earning power

 Free cash flows differ significantly from dividends

 For valuation of entire firms (especially in M&A)

Assumptions:

 Free cash flows are better indicators of value

 Firm will pay out cash flows to investors eventually

Q11. (ii) Dividend Projection

Given:

 Current dividend (D<sub>0</sub>) = $1.50

 Growth first 3 years = 7%

 Subsequent growth = 5%
Year 1: 1.50 × 1.07 = 1.605Year2:1.605×1.07=1.605Year2:1.605×1.07=1.717
Year 3: 1.717 × 1.07 = 1.837Year4:1.837×1.05=1.837Year4:1.837×1.05=1.929
Year 5: 1.929 × 1.05 = $2.025

Q11. (iii) Stock Valuation

Using constant growth model:


FCF<sub>0</sub> = Rs. 150 million
Growth rate (g) = 5%
WACC (r) = 10%

Firm value = FCF<sub>1</sub>/(r - g) = (150 × 1.05)/(0.10 - 0.05) = 157.5/0.05 = Rs. 3,150 million

Per share value = 3,150/50 = Rs. 63 per share

Q12. (a) Capital Budgeting

Capital budgeting: Process of evaluating long-term investment projects

Alternative criteria:

1. Net Present Value (NPV)

2. Internal Rate of Return (IRR)

3. Modified IRR (MIRR)

4. Payback Period

5. Discounted Payback Period

6. Profitability Index

Q12. (b) NPV Superiority

Why NPV is best:

 Directly measures value added in monetary terms

 Considers all cash flows

 Properly accounts for time value of money

 Consistent with wealth maximization goal

Overcomes problems in other methods:

 Unlike IRR, doesn't have multiple solution problem

 Unlike payback, considers all cash flows and their timing

 Unlike IRR, assumes reinvestment at WACC (more realistic)

Q12. (c) Project Analysis

(1) NPV at 12%

Project A:
NPV = -300 - 387/(1.12) - 193/(1.12)<sup>2</sup> - 100/(1.12)<sup>3</sup> + 600/(1.12)<sup>4</sup> +
600/(1.12)<sup>5</sup> + 850/(1.12)<sup>6</sup> - 180/(1.12)<sup>7</sup>
= -300 - 345.54 - 153.87 - 71.18 + 381.31 + 340.46 + 430.74 - 81.43
= Rs. 200.49

Project B:
NPV = -405 + 134 × PVIFA(12%,6) + 50/(1.12)<sup>7</sup>
= -405 + 134 × 4.1114 + 50 × 0.4523
= -405 + 550.93 + 22.62
= Rs. 168.55

(2) IRR

Project A: Solve for r where NPV=0 (requires trial-error or financial calculator)


Approximately 18.1%

Project B:
0 = -405 + 134 × PVIFA(r,6) + 50/(1+r)<sup>7</sup>
Approximately 19.0%

(3) MIRR at 12%

Project A:

 Negative CFs discounted to PV at 12%: -300 - 387/1.12 - 193/1.12² - 100/1.12³ = -870.59

 Positive CFs compounded to FV at 12%: 600×1.12² + 600×1.12 + 850 + (-180) = 752.64 + 672 + 850 - 180 =
2094.64
MIRR: (2094.64/870.59)<sup>1/7</sup> - 1 ≈ 13.6%

Project B:

 PV of negative CFs: -405

 FV of positive CFs: 134 × FVIFA(12%,6) + 50 = 134 × 8.1152 + 50 = 1137.44


MIRR: (1137.44/405)<sup>1/7</sup> - 1 ≈ 16.3%

(4) Project Selection

At WACC=12%:

 Both projects have positive NPV, but A has higher NPV (200.49 vs 168.55)

 Both IRR > WACC, but B has higher IRR (19.0% vs 18.1%)

 MIRR also favors B (16.3% vs 13.6%)

Decision: Choose Project A based on higher NPV (primary criterion)

At WACC=18%:
Need to recalculate NPVs:
Project A NPV ≈ -48
Project B NPV ≈ 20
Now only Project B has positive NPV, so choose B

(5) NPV Profile

(Conceptual explanation as we can't draw here)

 Plot NPV on Y-axis, discount rate on X-axis


 Project A's curve would be steeper (more sensitive to discount rate changes)

 Crossover rate where both projects have same NPV is around 14-15%

(6) MIRR at 18%

Recalculate using same method but with 18% financing and reinvestment rates

Project A:
PV of negative CFs at 18%: -300 - 387/1.18 - 193/1.18² - 100/1.18³ ≈ -798.30
FV of positive CFs at 18%: 600×1.18² + 600×1.18 + 850 - 180 ≈ 835.44 + 708 + 850 - 180 ≈ 2213.44
MIRR: (2213.44/798.30)<sup>1/7</sup> - 1 ≈ 15.4%

Project B:
PV of negative CFs: -405
FV of positive CFs: 134 × FVIFA(18%,6) + 50 ≈ 134 × 9.4420 + 50 ≈ 1315.23
MIRR: (1315.23/405)<sup>1/7</sup> - 1 ≈ 18.8%

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