Earnings per share of Alxa Piston Ltd. expected at the end of the year 2015-2016 is ₹18. The earnings per share in the year 2014-2015 is ₹16. The required rate of return is 25% p.a. and the dividend pay-out ratio is 30%
CS Executive · Capital Markets & Securities Laws · PYQS · June 2018
Earnings per share of Alxa Piston Ltd. expected at the end of the year 2015-2016 is ₹18. The earnings per share in the year 2014-2015 is ₹16. The required rate of return is 25% p.a. and the dividend pay-out ratio is 30% which is expected to remain constant. If the earnings are expected to grow at the historical growth rate, compute the value of the share of the company at the beginning of 2015-2016.
Answer & Explanation:
Computation of Value of shares of the company at the beginning of 2015-16 Current Value of the share = Expected dividend a year / (Required rate of return - Growth rate in dividends) In the given case, dividend a year hence = EPS × Dividend Payout = ₹18 × 0.3 = ₹5.4 Required Rate of return = 0.25 Growth rate (as payout ratio remains constant) Growth rate in EPS = (₹18 / ₹16) - 1 = 12.5% Value of share = ₹5.4 / (0.25 - 0.125) = ₹43.2
Topics: Equity Valuation