Q10.
(i) Common Stockholder Rights
1. Voting rights (elect board of directors)
2. Dividend rights (share in profits when declared)
3. Residual claim (assets in liquidation after creditors)
4. Preemptive rights (right to maintain proportional ownership)
5. Information rights (access to financial reports)
6. Right to sue for wrongful acts
Q10. (ii) Intrinsic Value and Models
Intrinsic value: True underlying value based on company's fundamentals, distinct from market price
Discounted Dividend Model:
Values stock as present value of all future dividends
Formula: P<sub>0</sub> = Σ D<sub>t</sub>/(1+r)<sup>t</sup>
Best for mature, dividend-paying companies
Constant Growth Model (Gordon Growth):
Special case of DDM assuming constant dividend growth
Formula: P<sub>0</sub> = D<sub>1</sub>/(r - g)
Where D<sub>1</sub> = next year's dividend, r = required return, g = growth rate
Q11. (i) Corporate Valuation vs DDM
Corporate Valuation Model is preferred when:
Company doesn't pay dividends
Dividends aren't representative of earning power
Free cash flows differ significantly from dividends
For valuation of entire firms (especially in M&A)
Assumptions:
Free cash flows are better indicators of value
Firm will pay out cash flows to investors eventually
Q11. (ii) Dividend Projection
Given:
Current dividend (D<sub>0</sub>) = $1.50
Growth first 3 years = 7%
Subsequent growth = 5%
Year 1: 1.50 × 1.07 = 1.605Year2:1.605×1.07=1.605Year2:1.605×1.07=1.717
Year 3: 1.717 × 1.07 = 1.837Year4:1.837×1.05=1.837Year4:1.837×1.05=1.929
Year 5: 1.929 × 1.05 = $2.025
Q11. (iii) Stock Valuation
Using constant growth model:
FCF<sub>0</sub> = Rs. 150 million
Growth rate (g) = 5%
WACC (r) = 10%
Firm value = FCF<sub>1</sub>/(r - g) = (150 × 1.05)/(0.10 - 0.05) = 157.5/0.05 = Rs. 3,150 million
Per share value = 3,150/50 = Rs. 63 per share
Q12. (a) Capital Budgeting
Capital budgeting: Process of evaluating long-term investment projects
Alternative criteria:
1. Net Present Value (NPV)
2. Internal Rate of Return (IRR)
3. Modified IRR (MIRR)
4. Payback Period
5. Discounted Payback Period
6. Profitability Index
Q12. (b) NPV Superiority
Why NPV is best:
Directly measures value added in monetary terms
Considers all cash flows
Properly accounts for time value of money
Consistent with wealth maximization goal
Overcomes problems in other methods:
Unlike IRR, doesn't have multiple solution problem
Unlike payback, considers all cash flows and their timing
Unlike IRR, assumes reinvestment at WACC (more realistic)
Q12. (c) Project Analysis
(1) NPV at 12%
Project A:
NPV = -300 - 387/(1.12) - 193/(1.12)<sup>2</sup> - 100/(1.12)<sup>3</sup> + 600/(1.12)<sup>4</sup> +
600/(1.12)<sup>5</sup> + 850/(1.12)<sup>6</sup> - 180/(1.12)<sup>7</sup>
= -300 - 345.54 - 153.87 - 71.18 + 381.31 + 340.46 + 430.74 - 81.43
= Rs. 200.49
Project B:
NPV = -405 + 134 × PVIFA(12%,6) + 50/(1.12)<sup>7</sup>
= -405 + 134 × 4.1114 + 50 × 0.4523
= -405 + 550.93 + 22.62
= Rs. 168.55
(2) IRR
Project A: Solve for r where NPV=0 (requires trial-error or financial calculator)
Approximately 18.1%
Project B:
0 = -405 + 134 × PVIFA(r,6) + 50/(1+r)<sup>7</sup>
Approximately 19.0%
(3) MIRR at 12%
Project A:
Negative CFs discounted to PV at 12%: -300 - 387/1.12 - 193/1.12² - 100/1.12³ = -870.59
Positive CFs compounded to FV at 12%: 600×1.12² + 600×1.12 + 850 + (-180) = 752.64 + 672 + 850 - 180 =
2094.64
MIRR: (2094.64/870.59)<sup>1/7</sup> - 1 ≈ 13.6%
Project B:
PV of negative CFs: -405
FV of positive CFs: 134 × FVIFA(12%,6) + 50 = 134 × 8.1152 + 50 = 1137.44
MIRR: (1137.44/405)<sup>1/7</sup> - 1 ≈ 16.3%
(4) Project Selection
At WACC=12%:
Both projects have positive NPV, but A has higher NPV (200.49 vs 168.55)
Both IRR > WACC, but B has higher IRR (19.0% vs 18.1%)
MIRR also favors B (16.3% vs 13.6%)
Decision: Choose Project A based on higher NPV (primary criterion)
At WACC=18%:
Need to recalculate NPVs:
Project A NPV ≈ -48
Project B NPV ≈ 20
Now only Project B has positive NPV, so choose B
(5) NPV Profile
(Conceptual explanation as we can't draw here)
Plot NPV on Y-axis, discount rate on X-axis
Project A's curve would be steeper (more sensitive to discount rate changes)
Crossover rate where both projects have same NPV is around 14-15%
(6) MIRR at 18%
Recalculate using same method but with 18% financing and reinvestment rates
Project A:
PV of negative CFs at 18%: -300 - 387/1.18 - 193/1.18² - 100/1.18³ ≈ -798.30
FV of positive CFs at 18%: 600×1.18² + 600×1.18 + 850 - 180 ≈ 835.44 + 708 + 850 - 180 ≈ 2213.44
MIRR: (2213.44/798.30)<sup>1/7</sup> - 1 ≈ 15.4%
Project B:
PV of negative CFs: -405
FV of positive CFs: 134 × FVIFA(18%,6) + 50 ≈ 134 × 9.4420 + 50 ≈ 1315.23
MIRR: (1315.23/405)<sup>1/7</sup> - 1 ≈ 18.8%
