Question

QUESTION:

Tanry Industries ltd.is an SME that has 1.9 million shares outstanding. It just paid a dividend of GH¢ 0.05. It estimates that dividends will grow at 17.9% for two years and 11.6 % for another two years. The discount rate is 11.9% Thereafter, the dividend growth rate will be a constant of 7.5 %

(a) Compute the intrinsic share price.

(b) If the founding shareholders are willing to sell 47 percent of its shares to an outside investor, how much should they sell the shares?  

(c) If the market price of a share is GH¢ 2.17, what is the market value of the company?

(d) Why is there a difference between the market value and intrinsic value of the company?

Answer 1

А B с E H - 1 2 3 4 0 1 2 3 4 5 Year DPS Growth 5 6 0.0500 0.0590 0.0695 0.0776 0.0866 0.0931 17.90% 17.90% 11.60% 11.60% 7.50% 0.052681 0.055506 0.055357 0.055208 1.348843 7 PV Intrinsic value 1.57 1900000 8 9 a) 10 11 12 13 b) 14 15 16 17 c) 18 19 20 d) 21 22 47 total shares % No of shares to be sold 893000 MP Market value 2.17 4123000 Intrinsic value is known as the estimate of the share value and not actual value whereas he market value is the actual value at which trading occurs. It include demand and supply and volatility factors also

A B с D E F G H 1 2 3 4 5 Oo 0.05 5 6 Year DPS Growth PV 1 2 3 4 =C5*(1+D6) =D5*(1+E6) =E5*(1+F6) =F5*(1+G6) =G5*(1+H6) 0.179 0.179 0.116 0.116 0.075 =D5/(1+11.9%)^D4 =E5/(1+11.9%)^E4 =F5/(1+11.9%)^F4 =G5/(1+11.9%)^G4 =H5/((11.9%-7.5%)*(1+11.9%)^4) 7 8 =SUM(D7:H7) 9 a) Intrinsic value 10 11 12 13 b) total shares -1.9*10^6 14 % 47 15 No of shares to be sold =C13*C14/100 16 17 c) MP 2.17 18 Market value =C17*C13 19 20 d) Intrinsic value is known as the e 21 market value is the actual value 22 factors also 23