An Application of Dividend Discount Model to Telecom Service Companies of India
Purpose: The paper aims at applying the single period dividend discount model to ascertain the intrinsic value of the select telecom service companies of India. It also investigates the association between the intrinsic value of select companies' stocks and profitability measures like, ROE, ROCE and net profit.
Design/Methodology/Approach: A descriptive and an analytical research design are used in the study. The secondary data relating to stock price, beta values, dividend per share and financial ratios were culled from CAPITALINE database. The study covers the nine year time period ranging from 2006 to 2014. The data relating to the risk free rate were taken from the Reserve bank of India website. A stepwise multiple regression analysis is used to examine the relationship between intrinsic value per share and ROE, ROCE and net profit.
Findings: The study finds that Tata Communications Ltd recorded highest mean intrinsic value during the study period. The results of stepwise multiple regressions suggest that ROCE is statistically significantly related to intrinsic value per share. ROE and net profit are found to be statistically insignificant while explaining variation in the intrinsic value of the sample companies' stocks. Implications: The results of the study imply that by maximizing ROCE managers can enhance the intrinsic value of the company's stock. This will compel managers to focus more on ROCE that in turn will maximize the operational efficiency.
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