Question

You working as a fund manager and trying to value the stock of MELUR Berhad. Company has 10 million shares outstanding. All the answer must be calculated in Microsoft Excel. Below are the projections for the next four years based on the following assumptions:

MELUR Berhad

-Sales will be RM 600 million in year 1

-Sales will grow at 20% in year 2 and 3 while at year 4 is 15%

-Interest expenses will be RM30 million per year

-Depreciation expenses will be RM 10 million per year

-Marketing expenses will be 20 % of sales in each year

-Income tax rate is 40%

-Earnings retention ratio will be fixed at 0.60

-Per share dividend will grow at 4% indefinitely from year 5 and thereafter

-You estimated that required rate of return will be at 18%.

Questions:

1. Calculate the EBIT from year 1 until year 4.

2. Calculate net income from year 1 until year 4.

3. Calculate dividend per share from year 1 until year 4.

(10 Marks

4. Calculate price of the stock at year 4 (terminal value), theoretical price of the stock.

5. Assume current market price is RM105.50, should you purchase the Melati Berhad stock?

Answer 1

	[$ in millions, except per share dividend/value]	0	1	2	3	4
	Sales revenue		$     600.00	$           720.00	$           864.00	$            993.60
	Interest expenses		$       30.00	$             30.00	$             30.00	$              30.00
	Marketing expenses		$     120.00	$           144.00	$           172.80	$            198.72
	Depreciation		$       10.00	$             10.00	$             10.00	$              10.00
i]	EBIT		$     440.00	$           536.00	$           651.20	$            754.88
	Tax at 40%		$     176.00	$           214.40	$           260.48	$            301.95
ii]	NI		$     264.00	$           321.60	$           390.72	$            452.93
	Total dividends [40% of NI]		$     105.60	$           128.64	$           156.29	$            181.17
	Number of shares in millions		10	10	10	10
iii]	Dividend per share		$       10.56	$             12.86	$             15.63	$              18.12
	Terminal value of dividends = 9.34*1.04/(0.18-0.04) =					$              69.38
	Total value of dividends		$       10.56	$             12.86	$             15.63	$              87.50
	PVIF at 18%	1	0.84746	0.71818	0.60863	0.51579
	PV of dividends at 18%		$          8.95	$               9.24	$               9.51	$              45.13
iv]	Theoretical price = PV of total value of dividends	$              72.83	per share
v]	The current market price at R105.50 is higher than the theoretical [intrinsic value] of the share. In other words, the share is
	overpriced in the market. Hence, it should not be purchased.