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

Asha Textiles has just paid a dividend of Rs 20 per share. Dividends are expected to grow at 5% per year forever, and the investors' required return is 15%. What is the intrinsic value per share under the constant growth model?

The intrinsic value is Rs 210. Next year's dividend is Rs 21 (Rs 20 grown by 5%), and dividing by the required return minus growth, which is 10%, gives Rs 210 per share.

  1. ARs 200
  2. BRs 210Correct
  3. CRs 140
  4. DRs 133

Explanation

D1 = 20 x 1.05 = Rs 21. Value = 21 / (0.15 - 0.05) = 21 / 0.10 = Rs 210. Rs 200 results from using D0 instead of D1. Check: 210 x 0.10 = 21.

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