Skip to content

CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance

Kaveri Pharma Ltd paid a dividend of ₹10 per share (D0) last year. Dividends are expected to grow at 20% a year for the next 2 years and then at a constant 5% a year forever. The required return is 15%. What is the intrinsic value per share today (to the nearest paisa)?

The intrinsic value is ₹135.65. Dividends of ₹12 and ₹14.40 are discounted for two years, and the terminal value at year 2 is 15.12 divided by 10%, or ₹151.20, discounted two years. The three present values sum to ₹135.65.

  1. A₹135.65Correct
  2. B₹130.21
  3. C₹114.33
  4. D₹120.74

Explanation

D1 = 12 and D2 = 14.40. D3 = 14.40 × 1.05 = 15.12. Value at end of year 2 = 15.12 / (0.15 − 0.05) = 151.20. PV = 12/1.15 + 14.40/1.3225 + 151.20/1.3225 = 10.43 + 10.89 + 114.33 = ₹135.65. ₹130.21 results from capitalising D2 instead of D3 in the terminal value. ₹114.33 counts only the terminal value.

Did you get it right without looking?

One question tells you little. A timed set on Equity and Bond Valuation and Evaluation of Performance shows your real accuracy, how long you take and where you lose marks.

Practise Equity and Bond Valuation and Evaluation of PerformanceFree diagnostic mock

More Equity and Bond Valuation and Evaluation of Performance questions