Financial management revision question and answer

CPA-Financial-Management-Section-3 Revision kit

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.

Required:
The intrinsic value of the shares
ANSWER

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

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