NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles
A company expects next year's dividend of Rs 6 per share. Its cost of equity is 14% and dividends are expected to grow at 8% forever. What is the intrinsic value per share under the Gordon model?
The intrinsic value is Rs 100 per share. Using the Gordon growth model, next year's dividend of Rs 6 is divided by the spread between the 14% cost of equity and 8% growth, which is 6%, giving Rs 100.
- ARs 75
- BRs 100Correct
- CRs 42.86
- DRs 27.27
Explanation
Value = D1/(ke - g) = 6/(0.14 - 0.08) = 6/0.06 = Rs 100. Check: 100 x 0.06 = 6. Rs 75 results from wrongly using 0.08 as denominator (6/0.08); Rs 42.86 uses 6/0.14.
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