Question

For a share of stock is currently selling at SAR 168, the expected dividends are SAR 13/share and the expected price in 1 year is SAR 181/share. Assume a discount rate of 12%. What is the intrinsic value, Expected Return, and Capital Appreciation for this share?

Answer 1

CALCULATION OF CAPITAL APPRECIATION

EXPECTED PRICE= SAR 181

CURRENT MARKET PRICE = SAR 168

CHANGE IN PRICE IS CAPITAL APPRECIATION= 181-168

=SAR 13

% CAPITAL APPRECIATION = CHANGE IN PRICE / INITIAL INVESTMENT

=13*100/ 168

= 7.74%

CALCULATION OF EXPECTED RETURN

EXPECTED RETURN = (CHANGE IN PRICE + DIVIDENDS)/ INITIAL INVESTMENT

= (13+ 13)*100/ 168

= 15.48%

CALCULATION OF INTRINSIC VALUE

INTRINSIC VALUE = PRESENT VALUE OF EXPECTED PRICE + PRESENT VALUE OF ALL DIVIDEND PAYOUTS

= 181*100/112+ 13*100/112

=161.60+ 11.60

= SAR 173.2