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Valuation and Investment Analysis

The document presents various financial scenarios involving Z Ltd. and other firms, focusing on dividend growth, project valuation, investment calculations, income statements, bond valuation, and stock pricing based on earnings and dividends. Key calculations include intrinsic value, present value, expected returns, abandonment options, and stock valuation using P/E ratios and dividend growth models. The scenarios require applying financial principles to determine investment viability and stock prices based on projected growth rates and market conditions.

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268 views2 pages

Valuation and Investment Analysis

The document presents various financial scenarios involving Z Ltd. and other firms, focusing on dividend growth, project valuation, investment calculations, income statements, bond valuation, and stock pricing based on earnings and dividends. Key calculations include intrinsic value, present value, expected returns, abandonment options, and stock valuation using P/E ratios and dividend growth models. The scenarios require applying financial principles to determine investment viability and stock prices based on projected growth rates and market conditions.

Uploaded by

seceh93562
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

1. Z Ltd. paid a dividend of Rs. 5 for the current year.

The dividend is
expected to grow at 25% for the next 6 years and at 10% per annum
thereafter. The return of government bond is 13% per annum and market
return is expected to be around 20%. The correlation between market
return and Z Ltd. share return is 0.3733. The standard deviation of market
return and Z Ltd. shares is 12% and 18% respectively.

What is the intrinsic value of Z Ltd. shares?

What is the present value at the end of 4th year?

What is the expected return of Z Ltd shares?

If current market price of the shares is Rs. 315 then would you
recommend to buy this share?

2. A firm is considering a proposal to set up a cement manufacturing plant


with an initial investment of Rs. 150 crore. The firm has the option to
abandon the project after one year by selling it to a competitor for Rs.100
crore if the market conditions are unfavourable and the demand is low,
the out to be favourable and the demand for cement is high, the value of
the project at the end of year 1 will increase by 50%.

Given that the risk-free rate of interest as 8%, what will be the value of
the abandonment option and the value of the project with abandonment
option?

3. PQ Ltd. expects sales of Rs. 100 lakhs in the year 1. The same will
increase by Rs. 20 lakhs per year over the next four years. At the end of 5
years the project would be wound up. The Deprecation will be charged at
20% p.a. on straight line method. The expenses excluding the
depreciation will be 40% of the sales. There will be no salvage value of the
plant. PQ Ltd. proposes to invest in the plant an amount where the Net
Present Value will be Zero.

Corporate Tax rate is 30%.

You are required to calculate the investment which can be made in the
plant.

4. Following is the condensed income statement of a firm for the current


year :
The firm’s existing capital consists of Rs. 150 Lakh equity funds, having 15
percent cost and of Rs. 100 Lakh,12 percent debt. Determine the NOPAT
and the WACC.

5. A corporate bond has a face value of ₹1,000, pays a 6% annual coupon


rate (semi-annually), and matures in 5 years. If the required rate of return
(yield) is 8%, what is the bond's current value?

6. A bond with a face value of ₹1,000 is currently trading at ₹950. It pays


a 5% annual coupon (annually) and has 4 years until maturity. What is its
approximate yield to maturity?

7. A company reported earnings per share (EPS) of ₹3.75 last year.


Analysts expect earnings to grow at 8% annually for the next 5 years. The
company's industry typically trades at a P/E ratio of 15. What is a
reasonable estimate for the stock's current value?

8. A company will pay a dividend of ₹1.20 next year. Dividends are


expected to grow at 15% annually for 3 years, after which the growth rate
will drop to 5% indefinitely. If the required rate of return is 12%, what is
the stock's current value?

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