1.

Dividend per share

= Dividend

Number of stocks

= 54,000

50,000

= RM1.08

Retention Ratio

= 1 - (Dividend per share / Earning per share)

= 1 - (1.08 / 4.32)

= 1 – 0.25

= 0.75

Growth rate, g

= Retention Ratio x Return on Equity

= 0.75 x 0.25

= 0.1875

Value of Stock, V

= D (1 + g)

R–g

= 1.08 (1 + 0.1875)

0.2 – 0.1875

= RM 102.60

1
2. Retention Ratio (Revised Assumption)

= 1 – (Dividend per share / Earning per share)

= 1 – (0.41 / 1.49)

= 1 – 0.28

= 0.72

Growth Rate (Revised Assumption)

= Retention Ratio x Return on Equity

= 0.72 x 0.13

= 0.0936

D1 = 1.08 (1+0.1875) = RM1.28

D 2 = 1.28 (1+0.1875) = RM1.52

D3 = 1.52 (1+0.1875) = RM1.81

D 4 = 1.81 (1+0.1875) = RM2.15

D5 = 2.15 (1+0.1875) = RM2.55

D6 = 2.55 (1+0.0936) = RM2.79

P5 = D 6

R–g

= 2.79

0.1167 - 0.0936

= RM 120.78

Value of Stock (Revised Assumption)

2
 D1 D2 D3 D4 D5 P5
= 1 + 2 + 3 + 4 + 5 + 5
( 1+ k ) ( 1+ k ) (1+k ) (1+k ) (1+k ) (1+k )

1.28 1.52 1.81 2.15 2.55

= (1+0.1167 )1
+ (1+0.1167 )2
+ (1+0.1167 )3
+ ( 1+ 0.1167 ) 4
+ (1+0.1167 )5
+

120.78
5
(1+0.1167 )

= RM 76.07

3
. Industry Price – Earnings Ratio

= Stock Price for Industry Average

Industry EPS

= 25.43

1.49

= 17.07

Shazz Corporation’s Price – Earnings Ratio (Original Assumptions)

= Value Per Share

EPS

= 102.60

4.32

= 23.75

Shazz Corporation’s Price – Earnings Ratio (Revised Assumptions)

= Value Per Share

EPS

= 76.07

4.32

= 17.61

Shazz Corporation price earning is higher than the industry price earning. This exist because

Shazz Corporation uses a higher required return compared to the industry average rate.

4
4. Cash Cow Value

= Dividend paid by the company

Industry Average (R)

= 108,000

0.1167

= 925,449.87

Percentage of Value Not Attributable to Growth Opportunities

= Cash Cow Value

Value of Stock Today

= 925,449.87

(76.07 x 100,000)

= 12.17%

Percentage of Value Attributable to Growth Opportunities

= 1 - Percentage of Value Not Attributable to Growth Opportunities

= 1 – 0.1217

= 87.83%

5
5. Return on Equity

= Industry Growth (g)

Retention Ratio (b)

= 0.0936

0.75

= 12.48%

It implies that the value of the stock price of Shazz Corporation will get lower because of the

lower growth rate.