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NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles

A company expects to pay a dividend of Rs 12 per share next year. Dividends are expected to grow at a constant 5% per year forever, and the investor's required rate of return is 11%. Using the Gordon growth (constant growth dividend discount) model, what is the intrinsic value per share?

The intrinsic value is Rs 200 per share. Under the constant growth dividend discount model, value equals next year's dividend divided by the difference between required return and growth: 12 divided by (11% minus 5%), which is 12 divided by 0.06, giving Rs 200.

  1. ARs 109.09
  2. BRs 200Correct
  3. CRs 120
  4. DRs 171.43

Explanation

Value = D1 / (k - g) = 12 / (0.11 - 0.05) = 12 / 0.06 = Rs 200. Check: 200 x 0.06 = 12. Rs 109.09 results from dividing by k alone minus nothing (12/0.11). Rs 120 wrongly uses 12/0.10 (k minus g of 1%). Rs 171.43 uses 12/0.07, which is a wrong denominator.

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