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

Question

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%

Help In Homework · Accepted Answer

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

Expert Solution

Archived Solution

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