SAPM

Exercise 1

1. RIL declared a dividend of Rs.60 last year. Earnings and dividends are expected to
grow at a rate of 10%. The required rate of return on RIL’s stock is 15%. What should
be the market price of RIL stock now?

2. The share of a certain stock paid a dividend of Rs. 2 last year. The dividend is
expected to grow at a constant rate of 6% in the future. The required rate of return on
this stock is considered to be 12 percent. How much should this stock sell for now?
Assuming that the expected growth rate and required rate of return remain the same,
at what price should the stock sell 2 years hence.

3. TCS’ earnings and dividends have been growing at the rate of 12% per annum. The
growth rate is expected to continue for 4 years. After that the growth rate would fall to
8% for the next 4 years. Beyond that the company would continue to grow at 5%
forever. If the last dividend was Rs.1.50 and the investors’ required rate of return on
the stock of TCS is 14%, how much should be the market value per share of TCS’
stock?

4. The current dividend on an equity share of Tata Motors is Rs.40. The present
growth rate is 20%. However, this will decline linearly over a period of 8 years and
stabilize at 10%. What is the intrinsic value per share of Tata Motors if investors a
require a return of 18%?

5. The price of a share currently is Rs.30. The expected EPS for the next year is Rs.
2.50. Investors require a return of 16% from this share. What proportion of the price is
accounted for by the present value of growth opportunities?

6. Consider the following three firms:

Growth Rate
Vimal 4%
Mahindra Satyam 8%
Adani 12%

The expected earnings per share and dividend per share next year for each of the three
firms are Rs.4.00 and Rs.2.00 respectively. Investors required total return from equity
investment is 16%. Calculate the stock price, dividend yield, capital gains yield, and
price-earnings ration for the three cases.

7. Determine the intrinsic value of an equity share, given the following data:

Last dividend: Rs. 2.00

Growth rate for the next 5 years: 15%
Growth rate for Years 6 to 10: 10%
Constant growth rate after 10 Years: 5%
Required rate of return: 12%

Prepared by Prof. Pavan Shah

 SAPM

8. You are analyzing the US equity market based upon the S&P Industrial index and
using the present value of free cash flow to equity technique. Your inputs are as
follows:

Beginning FCFE: $40.00

Required rate: 9%

Year Growth Rate

1-3 9%
4-6 8%
7 & beyond 7%

Assuming that the current value for the SAP Industrials Index is 1600, would you
underweight the US equity market?

9. You are given the following estimated per share data related to GSPL for the year
2010:

Sales: Rs. 1020

Depreciation: Rs. 45
Interest expense: Rs. 18

You are also informed that the estimated operating profit margin is 0.152 and the tax
rate is 32%.

Compute the estimated EPS for 2010.

10. You are considering acquiring shares of common stock. Your rate of return
expectations are as follows:

Probability Possible Return

0.15 0.20
0.15 -0.20
0.70 0.10

Compute the expected return and standard deviation.

11. You are given the following information on annual rates of return (HPY) for
common stocks listed on the NYSE:

Year Annual rate of return

2006 0.07
2007 0.11
2008 -0.04
2009 0.12
2010 -0.06

Compute the expected return and standard deviation.

Prepared by Prof. Pavan Shah