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
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-Pacic, 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 Shells 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?
Required Rate of Return on Equity for RDSA.AS | |||||||
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 Dividends | |||||||
to Common Equity (million) | $13,089 | 13,743 | 14,431 | 15,152 | 15,910 | 16,750 | 17,206 |
Continuing Value at the End of Year+5 | |||||||
Present Value Factors | |||||||
Present Values of Dividends | |||||||
Present Value of Continuing Value | |||||||
SUM of All Present Values | |||||||
Shares Outstanding (million) | 6,241 | ||||||
Per Share Intrinsic Value |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started