FIN622 - GDB # 1 Fall 2013

Topic of Discussion: “Common Stock Valuation”


Learning Objectives:
Understanding dividend discount Model and its application in investing decisions
Learning Outcomes:
This discussion will enable the students to understand how dividend discount model can be used to value the stock and to take buying or selling decisions of shares

Case:
B & G manufacture has earning per share (EPS) of Rs. 18 with a 20% payout policy for the year 2012. Required rate of return for such type of investment in the market is 18%. Dividend growth rate is 12% for foreseeable future.
Company is planning to change either its payout policy for year 2013 from 20% to 25%, or to change its growth rate from 12% to 14% to take extensive advertisement campaign and to make its share attractive for the shareholders. Currently shares of company are trading at Rs. 100. Management wants to see the impact of change in payout ratio and growth rate on share price. Assume earning per share will remain same for year 2013.

Required:
1. In the light of dividend discount Model discuss which option management should select to achieve the stated objective?
2. If management decides to change the payout ratio (20% to 25%), will it be feasible for investors to buy the shares of the company? Why or why not?
Justify your answers with logical reasoning.

Important Instructions:
1. Your discussion comments must be based on logical facts.
2. Your comments should be brief and to-the-point. Avoid unnecessary details.
3. Do not copy or exchange your comments with other students. Two identical / copied comments will be marked Zero (0).
4. Obnoxious or ignoble comments should be strictly avoided.
5. Questions / queries related to the content of the Discussion Board, which may be posted by the students on MDB or via e-mail, will not be replied till the due date is over.

Best Of Luck!!