1. Antique Arts Company would pay Rs. 2.50 as dividend per share for the next year
and is expected to grow indefinitely at 12%. What would be the equity value if the investor require 20% return?
Equity Value =
Market capitalization
+ Amount that in-the-money stock options are in the money
+ Value of equity issued from in-the-money convertible securities
- Proceeds from the conversion of convertible securities
Equity Value =
Market capitalization
+ fair value of all stock options (in the money and out of the money), calculated using the Black-Scholes formula or a similar method
+ Value of convertible securities in excess of what the same securities would be valued without the conversion attribute
P=D/(R-g)
P=2.5/(0.2-0.12)=31.25
To calculate the equity value, we can use the Gordon Growth Model, which is a formula used to estimate the intrinsic value of a stock based on its dividends and the required rate of return.
According to the Gordon Growth Model, the equity value can be calculated using the following formula:
Equity Value = Dividend per Share / (Required Rate of Return - Dividend Growth Rate)
In this case, the dividend per share is Rs. 2.50, the required rate of return is 20%, and the dividend growth rate is 12%.
Substituting these values into the formula:
Equity Value = 2.50 / (0.20 - 0.12)
Simplifying the equation:
Equity Value = 2.50 / 0.08
Equity Value = 31.25
Therefore, the equity value of the Antique Arts Company would be Rs. 31.25 if the investor requires a 20% return.