NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles
A stable company is expected to pay a dividend of Rs 22 next year. Dividends are expected to grow at 6% a year forever, and the investor's required return on equity is 12%. Using the constant growth dividend discount model, what is the intrinsic value per share?
The intrinsic value is Rs 366.67. Under the Gordon growth model, next year's dividend of Rs 22 is divided by the difference between required return of 12% and growth of 6%, which is 6%. Ignoring growth gives a wrong, lower value.
- ARs 183.33
- BRs 366.67Correct
- CRs 194.33
- DRs 275.00
Explanation
Value = D1 / (ke - g) = 22 / (0.12 - 0.06) = 22 / 0.06 = Rs 366.67. Check: 366.67 x 0.06 = 22. Rs 183.33 divides by 12% alone, ignoring growth, and Rs 194.33 grows the dividend again (22 x 1.06 / 0.12).
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