Scribd
Upload
86 views2 pages

Advance Financial Management - Stocks Valuation Self Test Problem

There are two main types of IPO issues: fixed price issues and book building issues. In a fixed price issue, the issuing company determines a fixed price for the shares. In a book building issue, the issuing company arrives at a price band and the final price is discovered based on bids submitted by investors within that price band. The SECP guidelines state that the upper limit of the price band cannot exceed 30% of the lower limit to ensure the price discovery process is fair.

Uploaded by

Waqar Ahmad
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
86 views2 pages

Advance Financial Management - Stocks Valuation Self Test Problem

There are two main types of IPO issues: fixed price issues and book building issues. In a fixed price issue, the issuing company determines a fixed price for the shares. In a book building issue, the issuing company arrives at a price band and the final price is discovered based on bids submitted by investors within that price band. The SECP guidelines state that the upper limit of the price band cannot exceed 30% of the lower limit to ensure the price discovery process is fair.

Uploaded by

Waqar Ahmad
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
You are on page 1/ 2

ADVANCE FINANCIAL MANAGEMENT - STOCKS VALUATION

SELF TEST PROBLEM


ST-01 Edward Company’s current stock price is Rs.36, and its last dividend was Rs.2.40. In view of Edward’s
strong financial position and its consequent low risk, its required rate of return is only 12 percent. If
dividends are expected to grow at a constant rate, g, in the future, and if Ks, is expected to remain at 12
percent, what is Edward’s expected stock price 5 years from now?

ST-02 Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected
to grow at a rate of 15 percent during the next 2 years, at 13 percent in the third year, and at a constant
rate of 6 percent thereafter. Snyder’s last dividend was Rs.1.15, and the required rate of return on the
stock is 12 percent.
a) Calculate the value of the stock today.
b) Calculate P1 and P2.
c) Calculate the dividend yield and capital gains yield for Years 1, 2, and 3.
PROBLEMS
Q.1 War Corporation just paid a dividend of Rs.1.50 a share (i.e., D 0 = Rs.1.50). The dividend is, expected to
grow 5 percent a year for the next 3 years, and then 10 percent a year thereafter. What is the expected
dividend per share for each of the next 5 years?

Q.2 Thomas Brothers is expected to pay Rs.0.50 per share dividend at the end of the year (i.e., D 1 = Rs.0.50).
The dividend is expected to grow at a constant rate of 7 percent a year. The required rate of return on the
stock, Ks, is 15 percent. What is the value per share of the company’s stock?

Q.3 Harrison Clothiers’ stock currently sells for Rs.20 a share. The stock just paid a dividend of Rs. 1.00 a share
(i.e., D0 = Rs.1.00). The dividend is expected to grow at a constant rate of 10 percent a year. What stock
price is expected 1 year from now? What is the required rate of return on the company’s stock?

Q.4 Fee Founders has preferred stock outstanding which pays a dividend of Rs.5 at the end of each year. The
preferred stock sells for Rs.60 a share. What is the preferred stock’s required rate of return?

Q.5 A company currently pays a dividend of Rs.2 per share, D 0 = 2. It is estimated that the company’s dividend
will grow at a rate of 20 percent per year for the next 2 years, and then the dividend will grow at a
constant rate of 7 percent thereafter. The company’s stock has a beta equal to 1.2, the risk-free rate is 7.5
percent, and the market risk premium is 4 percent. What would you estimate is the stock’s current price?

Q.6 A stock is trading at Rs.80 per share. The stock is expected to have a year-end dividend of Rs.4 per share
(D1 = 4), which is expected to grow at some constant rate g throughout time. The stock’s required rate of
return is 14 percent. If you are an analyst who believes in efficient markets, what would be your forecast
of g? -

Q.7 You are considering an investment in the common stock of Keller Corp. The stock is expected to pay a
dividend of Rs.2 a share at the end of the year (D 1 = Rs.2.00). The stock has a beta equal to 0.9. The risk-
free rate is 5.6 percent, and the market risk premium is 6 percent. The stock’s dividend is expected to
grow at some constant rate g. The stock currently sells for Rs.25 a share. Assuming the market is in
equilibrium, what does the market believe will be the stock price at the end of 3 years? (That is, what is
P3?)

Q.8 What will be the nominal rate of return on a preferred stock with a Rs.100 par value, a stated dividend of
8 percent of par, and a current market price of (a) Rs.60, (b) Rs.80, (c) Rs.100, and (d) Rs.140?

Q.9 Martell Mining Company’s ore reserves are being depleted, so its sales are falling. Also, its pit is getting
deeper each year, so its costs are rising. As a result, the company’s earnings and dividends are declining at
the constant rate of 5 percent per year. If D0 = Rs.5 and Ks = 15%, what is the value of Martell Mining’s
stock?
What are the different types of IPO issues?

There are 2 types of IPO issues namely the Fixed Price Issue and the Book Building Issue
1) Fixed Price Issue – The issuing company determines a fixed price for the issue.
2) Book Building Issue - The issuing company ‘discovers’ its price using the book building process.    

How does the book building process work?


Book building is a process of price discovery. There is no fixed price per share. Instead, the company
issuing the shares arrives at a price band.
 The lowest price is referred to as the ‘floor price’ and the highest, the ‘cap price’.
 Applicants then bid for the shares. Investors specify the desired quantity of shares as well as the
price they are willing to pay for the shares (depending on the price band).
 The final price is then discovered based on these bids.

The Securities and Exchange Commission of Pakistan’s (SECP) guidelines regarding initial public
offering (IPO) through book building, under which lower and upper limit of the offer would not have a
gap of 30 percent
 
According to the guidelines, the IPO issuer will set a price band instead of the Floor Price. The upper
limit of the price band will not exceed 30 percent of its lower limit. In case the lower limit of the price
band is Rs.50 then the upper limit of will not exceed Rs.65, it said.
 
A bid made at a price below the lower limit or above the upper limit of the price band will not be
accepted. A bid from any person other than an associated person or any other related person or party of
the issuer for more than 10 percent of the shares offered under the book building would not be
accepted, according to the guidelines.
 
Bids from associated persons or other related persons or parties of the issuer would not be accepted for
shares in excess of five percent. In case the book building portion is not fully subscribed and the issuer
decides to go ahead with the offer then the unsubscribed shares of the book building portion would be
made part of the general public portion of the issue / offer and would be underwritten at a price offered
to the general public, it added.
 
 

 
 

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy