Sfm queries thread

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Sourabh

Student

283 Points Posted on 20 November 2014

Hello friends,I am studying SFM and will be posting my queries and questions in t

his thread.Hopefully someone can answer them.Others can post their queries too

My first question is from Dividend Policy.Here's the question :

A Ltd. and B ltd are two companies.The most recent dividend paid by these two is Rs.1.8 per share and the required rate of return for both companies is 11%.The intrinsic value of share of A ltd. is Rs.34.12.The dividends of B ltd. are expected to grow at 8% annually for 3 years and 'X'% thereafter till infinity.The price of share of A ltd. is greater than the price of share of B ltd. by Rs.7.60.

Find the value of X

Replies (5)

Ashish

student

335 Points Posted on 21 November 2014

the ans of x is 42% but the thing is there isnt require any information of co A except its IV.

Sourabh

Student

283 Points Posted on 21 November 2014

Originally posted by : Ashish Jain Raparia
	the ans of x is 42% but the thing is there isnt require any information of co A except its IV.

hi thanks,can you please tell the full solution?

Ashish

student

335 Points Posted on 21 November 2014

The IV of B is 26.52 (34.12-7.6). The IV is the PV of the all future Cash Flows (here dividend). So discount the 3 dividends (5.11) and deduct that cumulative amount from IV. The remaining IV is the PV of the infinite future dividends. The dividend at y3 is 2.27 which will grow at x rate. Therefore:

21.41 = 2.27(1+x%)/.11/(1.11)^3

x=42%

hope u get it.

Sourabh

Student

283 Points Posted on 21 November 2014

Originally posted by : Ashish Jain Raparia
	The IV of B is 26.52 (34.12-7.6). The IV is the PV of the all future Cash Flows (here dividend). So discount the 3 dividends (5.11) and deduct that cumulative amount from IV. The remaining IV is the PV of the infinite future dividends. The dividend at y3 is 2.27 which will grow at x rate. Therefore: 21.41 = 2.27(1+x%)/.11/(1.11)^3 x=42% hope u get it.

Hi in the book the answer given is 3%