Question

1) Firm A distrubuted dividends to its shareholders for the current year according to the payout ratio of 25%. Net profit was 80 million TL. Total shares are 10 million . The dividends are expected to grow at a constant rate of %12 in the following years. Find the fundamental price per share according to Gordon Model if the Turkey 10 year benchmark government bond in TL yields at %14 and the risk premium is %6. If one share of firm A is selling at 32 TL in Borsa Istanbul, would you invest in this stock ? Is it undervalued or overpriced ?

Answer 1

Net profit = 80 m TL

Dividend= dividend payout*Net profit

=25%*80 m

= 20 m TL

Dividend per share= Total dividend/ Shares

= 20m/10 m

= 2 TL per share

Expected dividend next year= D1= D0*(1+growth)

= 2 * (1+12%)

= 2.24 TL

Required return (k) = 10 year benchmark government bond Yield+ Risk premium

=14%+6%

=20%

Intrinsic value= D1/(k-g)

= 2.24/(20%-12%)

= 28 TL

The market price is 32 TL which is much more than the intrinsic value. So the share is overpriced in the market. Hence I will not invest in this stock.