NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles
A company has expected dividend next year of Rs 12 per share, a constant growth rate of 6% forever and a required return of 14%. What is the intrinsic value per share using the Gordon growth model?
The intrinsic value is Rs 150 per share. Under the Gordon growth model, value equals next year's dividend of Rs 12 divided by the required return of 14% minus the growth rate of 6%, that is 12 divided by 0.08.
- ARs 85.71
- BRs 150Correct
- CRs 100
- DRs 200
Explanation
Value = D1/(ke - g) = 12/(0.14 - 0.06) = 12/0.08 = Rs 150. Check: 150 x 0.08 = 12. Rs 85.71 is 12/0.14 (ignoring growth), Rs 100 uses a 12% spread incorrectly, and Rs 200 uses 6% as the denominator.
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