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Homework answers / question archive / You have just started working at a boutique corporate finance house that has tasked you with valuing three shares in the automotive industry

You have just started working at a boutique corporate finance house that has tasked you with valuing three shares in the automotive industry

Finance

You have just started working at a boutique corporate finance house that has tasked you with valuing three shares in the automotive industry. In-house analysis has indicated that the shares are all expected long-term growth rates equal to inflation. Using the dividend discount model and the information provided in the table below, calculate the value of each share. The risk free rate is 5.3%, the expected inflation rate is 3% and the expected market risk premium is 7.5%. The market standard deviation is 14.4914% Shares A B ? Covariance/with Market 0.0154 0.0139 0.0121 Dividend 0 R36 R32 R46 Growth (years 1-2) 29.9% 25.9% 13.8% Growth (years 3-6) 14.5% 11.2% 5.1%

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Using dividend discount model        
value of share= D1/(Ke-g)        
D1= dividend of next year          
ke= cost of equity          
g= growth          
           
Using CAPM,          
Ke= Rf+Market risk premium*Beta    
Beta= Covariance/Standard deviation^2    
           
           
  A B C    
Covariance 0.0154 0.0139 0.0121    
Standard deviation^2 0.0210001 0.021 0.021000067    
Beta= 0.73 0.66 0.58    
Rf 5.30% 5.30% 5.30%    
Market risk premium 7.50% 7.50% 7.50%    
Ke= 10.80% 10.26% 9.62%    
           
           
Value of share A          
Year growth Dividend Present value factor @10.8% Present value  
1 29.90% 46.764 0.902527076 42.21  
2 29.90% 60.74644 0.814555123 49.48  
3 14.50% 69.55467 0.735158053 51.13  
4 14.50% 79.6401 0.663500048 52.84  
5 14.50% 91.18791 0.598826758 54.61  
6 14.50% 104.4102 0.540457363 56.43  
7 onwards 3% 107.5425   1378.75 =D1/(Ke-g)
           
      Value of share A 1685.45  
           
           
Value of share B          
Year growth Dividend Present value factor @10.26% Present value  
1 25.90% 40.29 0.906947216 36.54  
2 25.90% 50.72 0.822553252 41.72  
3 11.20% 56.40 0.746012382 42.08  
4 11.20% 62.72 0.676593852 42.44  
5 11.20% 69.75 0.613634911 42.80  
6 11.20% 77.56 0.556534474 43.16  
7 onwards 3% 79.88   1100.33 =D1/(Ke-g)
           
      Value of share B 1349.06  
           
           
           
Value of share C          
Year growth Dividend Present value factor @9.62% Present value  
1 13.80% 52.35 0.912242292 47.75  
2 13.80% 59.57 0.832185998 49.58  
3 5.10% 62.61 0.759155262 47.53  
4 5.10% 65.80 0.692533536 45.57  
5 5.10% 69.16 0.63175838 43.69  
6 5.10% 72.69 0.576316712 41.89  
7 onwards 3% 74.87   1130.92 =D1/(Ke-g)
           
      Value of share C 1406.93  
   

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