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CA Intermediate · Financial Management and Strategic Management · Dividend Decision

Gordon's model assumes that the market price of a share is the present value of an infinite stream of dividends growing at a constant rate. Anand Ltd expects next year's dividend (D1) of Rs 6, cost of equity of 14% and constant growth of 8%. What is the price per share?

Under Gordon's growth model, price equals next year's expected dividend divided by the difference between the cost of equity and the growth rate. Here 6 divided by (14% minus 8%) gives Rs 100 per share.

  1. ARs 75.00
  2. BRs 100.00Correct
  3. CRs 42.86
  4. DRs 54.55

Explanation

P0 = D1 / (Ke - g) = 6 / (0.14 - 0.08) = 6 / 0.06 = Rs 100. Rs 75 results from using Ke - g = 0.08 incorrectly as 6/0.08. Rs 42.86 divides by Ke alone (6/0.14).

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