Question

please show the calculation process

Qantas has experienced significant changes in the past few years. Its earnings per share increased from -128 cents in 2014 to 46 cents in 2017, and its share price also grew from about $1 in 2014 to over $5 in 2017.

Answer 1

Part (a)

Let the next three years be denoted as year 1, year 2 and year 3.

Book value of equity = $ 200; ROE = 12%; Dividend payout ratio = 50%; Hence retention ratio, R = 1 - dividend payout ratio = 1 - 50% = 50%, Hence growth rate in dividends = g = R x ROE = 50% x 12% = 6%; Cost of equity, Ke = 10%

Hence, earnings in year 1 = net income = Book value of equity x ROE = 200 x 12% = $ 24

Dividend payout ratio = 50%

Hence, dividend in year 1 = D1 = earnings in year 1 x Dividend payout ratio = 24 x 50% = $ 12

dividend in year 2 = D2 = D1 x (1 + g) = 12 x (1 + 6%) = $ 12.72

dividend in year 3 = D3 = D2 x (1 + g) = 12.72 x (1 + 6%) = $ 13.48

Fundamental value = D1 / ( Ke - g) = 12 / (10% - 6%) = $ 300

Part (b)

Abnormal earnings_t = Net income_t - Ke x book value of equity_{t - 1}

t = 1; Abnormal earning for year 1 = 24 - 10% x 200 = $ 4

Abnormal earning for year 2 = Abnormal earning for year 1 x (1 + g) = 4 x (1 + 6%) = $ 4.24

Abnormal earning for year 3 = Abnormal earning for year 2 x (1 + g) = 4.24 x (1 + 6%) = $ 4.49

Valuation = Book value of equity + Abnormal earnings of year 1 / (Ke - g) = 200 + 4 / (10% - 6%) = $ 300