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CS Executive · Corporate Accounting and Financial Management · Cost of Capital

Kaveri Auto Ltd has a current dividend (D0) of Rs 10 per share, which is expected to grow at 6% per annum indefinitely. The cost of retained earnings is 16%. The share price implied by the dividend growth model is closest to:

The implied share price is Rs 106. The next dividend is Rs 10 grown by 6%, giving Rs 10.60. Dividing by the difference between the 16% cost of equity and 6% growth, that is 10%, gives Rs 106.

  1. ARs 100.00
  2. BRs 106.00Correct
  3. CRs 62.50
  4. DRs 66.25

Explanation

D1 = 10 x 1.06 = Rs 10.60. Ke = D1/P0 + g, so P0 = D1/(Ke - g) = 10.60/0.10 = Rs 106. The Rs 100 option uses D0 instead of D1. The Rs 62.50 and Rs 66.25 options divide by Ke alone.

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