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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Sundaram Infra Ltd pays no dividend for the next 3 years. Dividends then begin: Rs 4 at the end of year 4, growing at 6% a year forever. Required return is 10%. Using the multi-stage dividend discount model, what is the approximate present value of the share today? (Discount factor at 10% for year 3 = 0.7513)

The first dividend of Rs 4 arrives at the end of year 4, so the share is worth 4 divided by 4%, or Rs 100, at the end of year 3. Discounting three years at 10% gives about Rs 75.13 today.

  1. ARs 75.13Correct
  2. BRs 82.64
  3. CRs 100.00
  4. DRs 66.67

Explanation

Dividend starts at end of year 4 as Rs 4, so value at end of year 3 = 4/(0.10 - 0.06) = Rs 100. Present value = 100 x 0.7513 = Rs 75.13. Rs 82.64 discounts for only 2 years (0.8264), and Rs 100 ignores discounting altogether.

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