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

Bharat Auto Ltd has a current dividend of Rs 4 per share, expected to grow at a constant 5% a year forever. Shareholders require a return of 15%. Using the constant growth dividend model, what is the intrinsic value per share today?

The intrinsic value is Rs 42. The next dividend is Rs 4.20 (4 grown by 5%), and dividing it by the difference between required return and growth (15% minus 5% = 10%) gives Rs 42 under the constant growth model.

  1. ARs 40.00
  2. BRs 42.00Correct
  3. CRs 28.00
  4. DRs 44.00

Explanation

D1 = 4 x 1.05 = Rs 4.20. Value = D1/(ke - g) = 4.20/(0.15 - 0.05) = Rs 42. Rs 40 results from using D0 instead of D1 in the numerator. Rs 28 divides by ke alone, ignoring growth in the denominator.

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