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CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance

Ananya Textiles Ltd. is expected to pay a dividend of Rs 6 per share next year. Dividends are expected to grow at 5% per annum forever. If the required rate of return on equity is 15%, what is the intrinsic value per share under the constant growth model?

The intrinsic value is Rs 60. Under the constant growth model, price equals next year's dividend divided by the difference between required return and growth, so 6 divided by (15% minus 5%) gives Rs 60 per share.

  1. ARs 40
  2. BRs 60Correct
  3. CRs 42
  4. DRs 120

Explanation

P0 = D1/(ke - g) = 6/(0.15 - 0.05) = 6/0.10 = Rs 60. Rs 40 results from dividing by 15% alone (ignoring growth). Rs 42 wrongly multiplies D1 by (1+g) and... not matching; Rs 120 uses a 5% denominator.

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