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

Arvind Autos has earnings per share of Rs 12, a retention ratio of 40%, and a return on equity of 15% on new investments. The required return on equity is 13%. Assuming growth g = b x ROE continues forever and the next dividend is based on current EPS grown by g, what is the justified value per share? (Use next-year EPS = current EPS x (1+g).)

The justified value is about Rs 109, which is not among the offered figures.

  1. ARs 108.00
  2. BRs 117.65Correct
  3. CRs 124.80
  4. DRs 102.00

Explanation

g = 0.40 x 15% = 6%. EPS1 = 12 x 1.06 = 12.72. Payout = 60%, so D1 = 7.632. Value = 7.632/(0.13 - 0.06) = Rs 109.03. Check options: none match, so recompute with care: 7.632/0.07 = 109.03.

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