Alloni ASA has 3 million shares with a market value of NOK 50 per share on 01.01

Question

Alloni ASA has 3 million shares with a market value of NOK 50 per share on 01.01.2016. Expected earnings this year (2016) are NOK 24 million after tax. Alloni is financed by equity only. The shareholders are expecting 18% return on their investment in Alloni after tax. The corporate tax is 20%. Alloni pay all earnings after tax in dividend on 31.12.2016.
What is the expected market value of the shares on 31.12.2016, just after the dividend is paid? (answer: 51 NOK) and what is the expected market value of the shares on 31.12.2016, just after the dividend is paid if the company were exempted from taxes? (answer: 49 NOK) This is all the information provided in the text.

Explanation / Answer

Expected Market Value of Shares as on 31.12.2016 just after the dividend is paid :-

Earning Per Share =24 Million / 3 Million = 8 per share

(Earnings/No. of Shares)

Return on Investment =8/50 *100=16%

Therefore, Market Value of Shares=(16/100 ) +1

=50/1.16 =43.10 NOK

The expected market value of the shares on 31.12.2016, just after the dividend is paid if the company were exempted from taxes :-

Total Earnings =24 million * 100/80

= 30 Million

No of Shares 3 Million

Earning Per Share =30 Million / 3 Million = 10 per share

(Earnings/No. of Shares)

Return on Investment =10/50 *100=20%

Therefore, Market Value of Shares=(20/100 ) +1

=50/1.20 =41.67 NOK

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