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Part A) For investment perspective you are analyzing the company which is working under the Engineering Sector International Steels Limited (ISL). A long time ago, it was considered as one of the best company by investors due to high dividend payouts though investors are always willing to invest in this company. Two years ago, position of this company’s cashflows become worst which impact the overall profitability on the company and the financial health amid ongoing situation of worst financial board of directors taken decision to cut down the dividends payments to the shareholder and share price also gradually declining in the market. After recent financial results, board of directors showed their positive expectations for revival of the company where new strategies implement to boost the sales and re-gain its market share. You are again want to investment in this company after analyzing the historical dividends payout patterns. Which are mentioned below:


2016

2017

2018

2019

2020

EPS

          7.90

          8.60

        10.50

        12.50

        13.00

Payout as per Par Value @ 10

20.00%

25.00%

35.00%

45.00%

50.00%

 

Further, you gathered the information pertaining to sales growth expectations and net margins which are analysis consensus for next 5 years.


2021

2020

2023

2024

2025

Sales growth

15.00%

12.00%

10.00%

13.00%

15.00%

Net Margin

25.00%

22.00%

23.00%

24.00%

20.00%

 

Currently company’s sales for the year ended FY 2020 stood at 48.081mn. You will apply the dividend discount model to value the company after calculation of the dividends properly. For calculation of cost of equity you can use the CAPM model (hint: use risk free rate as a 5-years PIB yield and Risk premium upto 7% while beta can be calculated through statistical variance methodology as explained in the class). This calculated cost of equity you can input in your formula to find out the intrinsic value and use sustainable growth rate 5.5% for dividends growth). (At least 250 words write up required)

 

Part B) This party is linked with part A, use the data from the part A and sensitize the intrinsic value by changes in cost of equity and growth projections so how it will impact on the company’s intrinsic value.

Cost of   Equity

Growth

8.00%

-5.00%

9.00%

-3.00%

10.00%

-2.00%

11.00%

-1.00%

12.00%

0.00%

15.00%

1.00%

18.00%

2.00%

20.00%

3.00%

25.00%

5.00%

 

Instructions:

You are required to calculate the intrinsic value of each part and then compared the calculated prices along with logical reason.


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