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Workshop 2: Share valuation

1. XYZ Ltd just paid a dividend of R3.00 per share. Dividends

are expected to grow at a a constant rate of 5% per year
indefinitely. If investors require a 12% return, what is the
current price? What is price in 3 years time?

2. Azanian Ltds next dividend payment will be R4.00 per share.

Dividends are anticipated to maintain a 6% growth rate forever.
If Azanians shares currently sell for R45, what is required rate
of return?

3. The ABC Production company has been hit hard due to

increased competition. The companys analysts predict that
earnings (and dividends) will decline at a rate of 5% annually
forever. Assume a rate of return of 11% and the dividend just
paid is R2. What will be the price of the companys stock three
years from now?

4. a) Five years ago the earnings per share (EPS) of XYZ Ltd was
R3, today the EPS is R5.60. The beta is 1.3, risk free rate is 4%,
expected return in the market is 15%. The historical dividend is
R1.50. What is price of share today? The market value R40.
Should the investor buy the share?

b) Find growth rate

Year s
1997 R 1.37
1998 1.58
1999 1.86
2000 1.82
2001 1.98
2002 2.05

c) g=ROE (1b)

g represents growth rate

ROE represents return on equity

b represents dividend payout value

ROE is 12% and dividend payout value is 4%. Find the growth

5. Harry Corp. is a young start-up company. No dividends will be

paid on the shares over the next five years, because the
company needs to plough back its profits to fuel growth. The
company will then begin paying a R6 per share dividend, and
will increase the dividend by 5% per year thereafter. If the
required return on the share is 23%, what is current price of

6. Giant Growth Co. is growing fast. Dividends are expected to

grow at a 30% growth rate for the next three years, then fall of
to a constant 7% growth rate thereafter. The required rate of
return is 23% and the company recently paid a R1.50 dividend.
What is the current share price?

7. The EPS of XYZ Ltd is R3.2. The P/E ratio is 10. What is the
share price?

8. Company XYZ last dividend was R0.50, and the company

expects to experience no growth for the next 2 years. However,
the company will grow at an annual rate of 5% in third and
fourth years, and, beginning with the fifth year, it should attain
a 10% growth rate which it should sustain thereafter. The
company has a cost of capital of 12%. What is the price of the

9. Free cash flow valuation model

determines the value of an entire company as the present

value of its expected free cash flows discounted
at the firms weighted average cost of capital, which is
its expected average future cost of funds over the long run.
FCF 1 FCF 2 FCF 3 V3
V c= 1
+ 2
+ 3
+ 3
(1+r ) (1+r ) ( 1+ r) (1+r )

Valuation approach exactly the same as dividend discount



FCF1 = FCFo*(1+g) and

FCF 3 (1+ g)
V 3=

Determine the value of the share price?

Calculate the value of common stock.

2013 2014 2015 2016 2017

1 2 3 4 5
600000 (1.03)
400000 450000 520000 560000 600000 0.090.03
V c= 1
+ 2
+ 3
+ 4
+ 5
(1.09) (1.09) ( 1.09) (1.09) (1.09) ( 1.09)5
Vc =

(Vc is market value of entire firm ie includes all assets)

Vs = Vc Vd Vp

Vs = 8628234 3100000 800000 = R4,728,234

Value per share = 4728234/300000 = R15.76

Intrinsic value = R15.76

Market value of share price R17.30