Royal Dutch Shell (RDSA.AS) is a petroleum and petrochemicals company. It engage

Question

Royal Dutch Shell (RDSA.AS) is a petroleum and petrochemicals company. It engages primarily in the exploration, production, and sale of crude oil and natural gas and the manufacture, transportation, and sale of petroleum and petrochemical products. The company operates in approximately 200 countries in North America, Europe, Asia-Paci?c, Africa, South America, and the Middle East. Analysts project 5% growth in earnings over the next ?ve years.

Assuming concurrent 5% growth in dividends, the following table provides the amounts that analysts project for Royal Dutch Shell’s total dividends for each of the next ?ve years. In Year +6, total dividends are projected for Royal Dutch Shell assuming that its income statement and balance sheet will grow at

a long-term growth rate of 3%.   At the end of Year 0, Royal Dutch Shell had a market beta of 0.71. At that time, yield onU.S. Treasury securities was 3.5%. Assume that the market required a 5.0% risk premium (i.e., market risk premium, MRP). Suppose Royal Dutch Shell had 6,241 million shares outstanding at the beginning of Year +1 that traded at a share price of $24.87.

Answer the following questions.

1) Calculate the required rate of return on equity for Royal Dutch Shell (use CAPM).

2) Calculate the sum of the present value of total dividends for Years +1 through +5.

3) Calculate the continuing value of Royal Dutch Shell at the start of Year +6 (i.e., as of the end of Year+5) using the perpetuity-with-growth model with Year +6 total dividends. Also compute the present

value of continuing value as of the beginning of Year +1.

4) Compute the total present value of dividends for Royal Dutch Shell as of the beginning of Year +1. Remember to adjust the present value for midyear discounting.

5) Compute the value per share of Royal Dutch Shell as of the beginning of Year +1 (i.e., as of the end of Year 0).

6) Given the share price at the start of Year +1, do Royal Dutch Shell shares appear underpriced, overpriced, or correctly priced?

MFor you convenience, I provide a spread sheet template for your workout below. You can answer all of the six questions by completing all highlighted cells. Rememberyou should do all of your necessary calculations on the template so I can figure out how all of the numbers are computed. Just giving numbers in the cells won't work.

Explanation / Answer

Royal Dutch Shell Details Risk Free rate=Rf= 3.50% Marker Risk Premium =Rm-Rf= 5% Beta of stock                   0.71 Required return of Stock=Rf+(Rm-Rf)*Beta =0.035+0.05*0.71= 7.05% 1 So Required return rate of Stock = 7.05% Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Projected growth 5% 5% 5% 5% 5% 5% 3% Projected total dividend to common equity Million              13,089            13,743                14,431            15,152.0            15,910.0            16,705.5           17,206.7 (there is a typo in yr 5 dividend given , corrected) 3 Continuing Value at the end of year 5+          437,602.5 =17206.7*1.03/(0.0705-0.03) Present Value factors @ 7.05%                         1            0.9645                0.8972                0.8346               0.7764                0.7222 PV factor=1/1.075^year-0.50 for midyear discounting 2 Present Value of dividends            13,255                12,947                12,646               12,352                12,065 SUM Of present value of dividends yr1-5            63,265 Present value of continuing value          316,039.7                                       11,882.62 SUM of all present Values          442,570 Share outstanding millions              6,241 Per share intrinsic value              70.91 Actual result may vary with the given result to you due to difference in discounting factor digits used and rounding off , Here 4 digit factor used for accuracy. As the share price at beginninh of Y1 is $24.87 and much leaa than intrinsci price of $70.91, the share is currently underpriced. Royal Dutch Shell Details Risk Free rate=Rf= 3.50% Marker Risk Premium =Rm-Rf= 5% Beta of stock           0.71 Required return of Stock=Rf+(Rm-Rf)*Beta =0.035+0.05*0.71= 7.05% 1 So Required return rate of Stock = 7.05% Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Reamrk/Calcul Projected growth 5% 5% 5% 5% 5% 5% 3% Projected total dividend to common equity Million      13,089      13,743     14,431        15,152     15,910       16,706    17,207 (there is a typo in yr 5 dividend given , corrected) 3 Continuing Value at the end of year 5+     437,602 =17206.7*1.03/(0.0705-0.03) Present Value factors @ 7.05%                 1      0.9645     0.8972        0.8346     0.7764       0.7222 PV factor=1/1.075^year-0.50 for midyear discounting 2 Present Value of dividends=Factor*dividend      13,255     12,947        12,646     12,352       12,065 SUM Of present value of dividends yr1-5      63,265 Present value of continuing value     316,040 SUM of all present Values 442,570 Share outstanding millions        6,241 Per share intrinsic value        70.91 Actual result may vary with the given result to you due to difference in discounting factor digits used and rounding off , Here 4 digit factor used for accuracy. As the share price at beginninh of Y1 is $24.87 and much leaa than intrinsci price of $70.91, the share is currently underpriced.

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