Question

Sherlock Bank is a commercial bank listed in the Philippines. Sherlock Bank’s credit rating: BB Philippine country rating: BBB Default Spread over US Treasury (% p.a.) A BBB BB B 1.00 2.10 3.20 4.40 10-year government bond yield in Philippine Peso: 3.8% 10-year US Treasury rate: 2.3% Relative volatility of bond versus equity: 0.8 times Beta for Philippine banks: 1.0 Mature market equity risk premium: 6%. Tax rate: 25% Exchange rate: 1 USD to 48.5 Philippine Peso (PHP)

In Year 0, Sherlock had EPS of 110 PHP per share, and its dividend payout ratio was 40%. It has 120 million shares outstanding.

Estimate the bank’s intrinsic value per share using the Dividend Discount Model and the assumptions below. (2 points) • Sustainable ROE: 14%. • High growth period (Year 1 to 3): payout ratio will be 40%. • Stable growth (Year 4 and thereafter): EPS will grow at a constant rate of 3.8%.

Answer 1

calculation of intrinsic value per share by using dividend discount method.