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

A firm's next-year dividend is expected to be Rs 12 per share. Dividends are expected to grow at 6% a year forever, and the required return on equity is 14%. Using the constant growth dividend discount model, the intrinsic value per share is:

The intrinsic value is Rs 150 per share. Under the Gordon growth model, value equals next year's dividend divided by the difference between required return and growth, so 12 divided by 8% gives Rs 150.

  1. ARs 85.71
  2. BRs 150.00Correct
  3. CRs 159.00
  4. DRs 200.00

Explanation

Value = D1 / (ke - g) = 12 / (0.14 - 0.06) = 12 / 0.08 = Rs 150. Check: 150 x 0.08 = 12. Rs 85.71 results from dividing by 14% alone, ignoring growth, and Rs 159 results from wrongly multiplying D1 by (1+g) and then still using the wrong denominator.

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