CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Gordon's model: Kaveri Ltd has EPS of Rs 10, a retention ratio of 40%, a return on investment of 20% and a cost of equity of 16%. What is the market price per share?
The price is Rs 75. Growth is retention 40% times return 20%, which is 8%. Dividend per share is 60% of Rs 10, which is Rs 6. Gordon's model gives 6 divided by the difference between 16% and 8%, resulting in Rs 75.
- ARs 60.00
- BRs 75.00Correct
- CRs 37.50
- DRs 100.00
Explanation
Growth g = b x r = 0.4 x 0.20 = 8%. DPS = 10 x 0.6 = Rs 6. P = D / (k - g) = 6 / (0.16 - 0.08) = 6 / 0.08 = Rs 75. Check: 75 x 0.08 = 6. Rs 100 would arise from using EPS Rs 10 as the dividend instead of the actual DPS of Rs 6 (10/0.08 = 125 is not offered, while 37.50 uses k - g = 0.16).
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