Question

Mohan Gupta is the portfolio manager of an India - based equity fund. He is analyzing thevalue of Tata Chemicals Ltd. (Bombay Stock Exchange: TATACHEM). Tata Chemicals is India’sleading manufacturer of inorganic chemicals, and also manufactures fertilizers and foodadditives. Gupta has concluded that the DDM is appropriate to value Tata Chemicals. The mostrecent dividend payment of Tata was $9. They have estimated that an average annual growth ratein DPS of just above 13 percent. Gupta has decided to use a three - stage DDM with a linearlydeclining growth rate in stage 2. He considers Tata Chemicals to be an average growth company,and estimates stage 1 (the growth stage) to be 6 years and stage 2 (the transition stage) to be 10years. He estimates the growth rate to be 14 percent in stage 1 and 10 percent in stage 3. Guptahas estimated the required return on equity for Tata Chemicals to be 16 percent. Estimate thecurrent value of the stock. Clarification: Assume 2008 = Year 0. Use the three-stage DDM, Version 2.

Answer 1

The Growth Rate in Stage 2 is take as average of stage 1 and stage 3 that is 12%.

Formula used:-

Terminal value=O17*(1+10%)/(16%-10%)

Value of Share=NPV(16%,O2:O17)+O18/(1+16%)^16

Description:-

Terminal Value = Dividend*(1+g)/(r-g)

Where, g = growth rate

r = required rate of return

Value of the share:- for any financial asset the, price of the asset is the present value of its future Cashflows and same with the share, the present value of dividend is price of the share.