Motor Works Limited intends to raise additional capital through an issue of ordinary shares of Shs. 80 par value. The company promises to pay dividend at the rate of Shs. 8 per annum and the expected market price of the shares after six years is Shs. 120.
An investor whose required rate of return is 10% intends to hold the shares for six years.
The intrinsic value of the shares
Value of a share = P.V of cash subflows.
P.V of D.P.S = Sh. 8 x PVAF10%, 6 = 8 x 4.355 = 34.84
P.V of selling price = 120 x PV1F10%, 6 = 120 x 0.564= 67.68
Intrinsic value 102.52