Exam
Assignment
MB0045 –Financial Management
Q.1 Considering the following information, what is the price of the share as per Gordon’s Model?
|Details of the Company Net sales |Rs.120 lakhs |
|Net profit margin |12.5% |
|Outstanding preference shares |Rs.50 lakhs@ 12% dividend |
|No. of equity shares |25, 000 |
|Cost of equity shares |12% |
|Retention ratio |40% |
|Rate of interest (ROI) |16% |
Ans. Net sales=rs 120 lakhs
Net profit=120 lakhs *12.5=15 lakhs
Dividend paid on preference shares=Rs 50 lakhs*12%= 6 lakhs
Total earnings=15-6= 9 lakhs
EPS=900000/250000
= 3.6
Apply the Gordon formula of p= E(1-b)/(ke-br)
Where p is the price of share,=?
E is earning per share= EPS = 3.6 b is Retention ration=40%=0.4
(1-b) is dividend payout ratio=1-0.4=0.6
Ke is cost of equity capital=12%=0.12
Rate of return on investment=16%=.016
Br is growth rate=0.4*0.16=0.064
P=E(1-b)/(ke-br) =3.6(1-0.4)/(0.12-0.064) =3.6*0.6/0.056 =2.16/0.056 =38.57
The price of the share=38.57
Q.2 Examine the components of working capital & also explain the concepts of working capital.
Ans. In this section, we look at the cyclicality and persistence of working capital and its constituents in UK data, as well as how working capital has been a_ected by the recent _nancial crisis.
Knowledge of these stylised facts is important to motivate the importance of our modelling contribution, and will hopefully also stimulate further work on the topic. These facts will also help us assess whether our model has the right implications for the variables in which we are most interested as well as motivate our analysis of how _nancial
MB0045 –Financial Management
Q.1 Considering the following information, what is the price of the share as per Gordon’s Model?
|Details of the Company Net sales |Rs.120 lakhs |
|Net profit margin |12.5% |
|Outstanding preference shares |Rs.50 lakhs@ 12% dividend |
|No. of equity shares |25, 000 |
|Cost of equity shares |12% |
|Retention ratio |40% |
|Rate of interest (ROI) |16% |
Ans. Net sales=rs 120 lakhs
Net profit=120 lakhs *12.5=15 lakhs
Dividend paid on preference shares=Rs 50 lakhs*12%= 6 lakhs
Total earnings=15-6= 9 lakhs
EPS=900000/250000
= 3.6
Apply the Gordon formula of p= E(1-b)/(ke-br)
Where p is the price of share,=?
E is earning per share= EPS = 3.6 b is Retention ration=40%=0.4
(1-b) is dividend payout ratio=1-0.4=0.6
Ke is cost of equity capital=12%=0.12
Rate of return on investment=16%=.016
Br is growth rate=0.4*0.16=0.064
P=E(1-b)/(ke-br) =3.6(1-0.4)/(0.12-0.064) =3.6*0.6/0.056 =2.16/0.056 =38.57
The price of the share=38.57
Q.2 Examine the components of working capital & also explain the concepts of working capital.
Ans. In this section, we look at the cyclicality and persistence of working capital and its constituents in UK data, as well as how working capital has been a_ected by the recent _nancial crisis.
Knowledge of these stylised facts is important to motivate the importance of our modelling contribution, and will hopefully also stimulate further work on the topic. These facts will also help us assess whether our model has the right implications for the variables in which we are most interested as well as motivate our analysis of how _nancial