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CA Final · Advanced Financial Management · Financial Policy and Corporate Strategy

Kaveri Foods Ltd expects an EPS of Rs 12 and retains 40% of earnings, with a return on retained funds of 15% and a cost of equity of 12%. Using the Gordon growth model, what is the intrinsic value per share, assuming the first dividend is due one year from now at the 60% payout on Rs 12?

Growth equals retention 40% times return 15%, which is 6%. The expected dividend is 60% of Rs 12, or Rs 7.20. Dividing by the difference between 12% cost of equity and 6% growth gives an intrinsic value of Rs 120 per share.

  1. ARs 120Correct
  2. BRs 80
  3. CRs 100
  4. DRs 60

Explanation

Growth g = b x r = 0.40 x 15% = 6%. D1 = 12 x 0.60 = Rs 7.20. Price = 7.20/(0.12-0.06) = Rs 120. Rs 100 would result from ignoring retention (12/0.12), and Rs 60 from using ke-g wrongly as 0.12.

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