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. All the information provided.

What is the expected market value of the shares on 31.12.2016, just after the dividend is paid? (answer: 51)

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)

What is the expected market value of the shares on 31.12.2016? (answer: 59)

There is no information about the growth rate. I tried using the formula Pcum-Pex=div((1-td)/(1-tg)), but I got 42, which isn't the correct answer. I've also tried using P=EPS*P/E-ratio.

Explanation / Answer

As all the earnings are being paid out, growth rate is zero.

Growth Rate = Return on Equity * (1 - Payout Ratio)

= 18% * (1 - 100%)

= 0

Expected Market Value of Shares on 31.12.2016 = Current Share Price + (Current Share Price * Exected Return )

= NOK 50 + (NOK 50 * 18%)

= NOK 59

Expected Market Value of shares on 31.12.2016 just after the dividend is paid = Expected Market Value of shares (as computed above) minus Dividend per share after tax

= NOK 59 per share - NOK 8 per share

= NOK 51 per share

Expected Market Value of shares on 31.12.2016 just after the dividend paid and tax is exempted = Expected Market Value of shares - Dividend per share if tax exempted

= NOK 59 per share - NOK 10 per share

= NOK 49 per share

Below additional information has been used -

Outstanding Shares = 3 million shares

Dividend Per Share after tax = (Earnings after tax * Payout Ratio) / Outstanding Shares

= (24 million * 100%) / 3 million

= NOK 8 per share

Dividend Per Share if tax exempted = (Earnings before tax * Payout Ratio) / Outstanding Shares

= {(NOK 24 million/80%) * 100%} / 3 million

= NOK 30 million / 3 million = NOK 10 per share

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