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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks

Caselet: Meera Iyer, a 35-year-old client, holds a Rs 10 lakh equity portfolio. Her share in Company X is expected to pay a dividend of Rs 6 next year (D1). Dividends are expected to grow at a constant 5% forever. Her required rate of return is 11%. Using the constant growth dividend discount model, what is the intrinsic value of one share of Company X?

Under the constant growth dividend discount model, value equals next year's dividend divided by the required return minus growth. That is Rs 6 divided by 0.06, which equals Rs 100. Using only the required return would ignore growth and give a wrong lower value.

  1. ARs 100Correct
  2. BRs 54.55
  3. CRs 120
  4. DRs 57.27

Explanation

Value = D1/(k - g) = 6/(0.11 - 0.05) = 6/0.06 = Rs 100. The 54.55 option uses 6/0.11, ignoring growth. The 120 option uses 6/0.05, using only the growth rate. The 57.27 option is 6/0.105 style, a wrong denominator.

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