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

Caselet: Ms Iyer, a 35-year-old client, holds a stock with a current price of Rs 120. Her adviser expects next year's dividend of Rs 6, with dividends growing at a constant 4% forever. Using the Gordon growth model, what is the required rate of return implied by the current price?

The implied required return is 9 percent. Under the Gordon growth model, required return equals the expected dividend yield plus growth: Rs 6 divided by Rs 120 gives 5 percent, and adding 4 percent growth gives 9 percent.

  1. A5%
  2. B9%
  3. C10%Correct
  4. D9.2%

Explanation

Price = D1/(k-g), so k = D1/P + g = 6/120 + 0.04 = 0.05 + 0.04 = 9%. Check: 6/(0.09-0.04) = 120. Option A is only the dividend yield. Option C (10%) is wrong.

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