The cost of capital and growth rate

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Corporate finance

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Table of Contents
Question 1..................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................5
c).............................................................................................................................................5
Question 2..................................................................................................................................6
References..................................................................................................................................8

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Question 1
a)
The valuation of the shares is made and for that, the company is required to make the use of
the most appropriate method. Several of the approaches are available and they can be utilized
in the process of making calculations. The ascertained value will be used in various processes
and for that the calculations are made in an appropriate manner.
Price earning approach: the calculation for the intrinsic value will be made by this and there
will be the use of the PE ratio and the earnings which are made on each share. There is the
need to make use of the formula which is specified.
Particulars 2013 2014 2015 2016
MPS 10 13.2 9 10
DPS 0.1 0.12 0.12 0.13
Pay-out ratio 20% 20% 30% 25%
EPS 0.5 0.6 0.4 0.52
PE 20 22 22.5 19.23077
Average earnings
multiplier
20.93
EPS 5.36
Intrinsic value 20.93 * 5.36
112.2 cents per share
$1.12 per share
P/E = share value / EPS
The EPS in the given case is calculated by dividing the DPS by pay-out ratio.
Dividend discount model:
Dividends are required to be paid by the company and in this method, the discounting of
them is made by considering the cost of capital and growth rate which is made applicable
(Ivanovski, Ivanovska and Narasanov, 2015).
The cost of equity will be calculated by using the CAPM approach which is as follows:
Ke = Rf + b (Rm – Rf)
Ke = 5 + 0.7 (12-5)