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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks

A company's stock is expected to pay a dividend of Rs 6 next year. Dividends are expected to grow at 5% a year forever, and the investor's required return is 11%. Using the constant growth dividend discount model, what is the intrinsic value of one share?

The intrinsic value is Rs 100. Under the constant growth model, value equals next year's dividend divided by required return minus growth rate, so 6 divided by 0.06 gives Rs 100.

  1. ARs 54.5
  2. BRs 100.0Correct
  3. CRs 120.0
  4. DRs 57.0

Explanation

Value = D1/(k - g) = 6/(0.11 - 0.05) = 6/0.06 = Rs 100. Dividing by k alone gives 54.5, and using 6/0.05 gives 120, which are errors in the denominator. Rs 57 results from wrongly growing the dividend and dividing by k.

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