CA Final · Advanced Financial Management · Security Analysis
Kaveri Textiles Ltd expects to pay a dividend of Rs 6 per share next year. Dividends are expected to grow at a constant 5% per annum forever. Investors require a return of 11%. What is the intrinsic value per share under the constant growth dividend discount model?
The intrinsic value is Rs 100 per share. Under the constant growth model, price equals next year's dividend divided by the difference between required return and growth: 6 divided by (11% minus 5%), which is 6 divided by 0.06.
- ARs 54.55
- BRs 100.00Correct
- CRs 109.09
- DRs 57.27
Explanation
Value = D1/(ke - g) = 6/(0.11 - 0.05) = 6/0.06 = Rs 100. Rs 109.09 wrongly uses a 5.5% denominator, as if D1 were grown again by 5% and the sum divided by 0.06 (6.30/0.06 = 105 actually) or uses 0.055. Rs 57.27 is 6*1.05/0.11, which ignores g in the denominator.
Did you get it right without looking?
One question tells you little. A timed set on Security Analysis shows your real accuracy, how long you take and where you lose marks.
More Security Analysis questions
- Which statement about the constant growth dividend discount model is correct?
- Anand Steels Ltd has a share price of Rs 240 and earnings per share of Rs 16. A peer group of comparable listed steel companies trades at an…
- A SEBI investigation finds that a director of Ganga Textiles Ltd. consistently earned abnormal profits by trading in the company's shares be…
- Kaveri Foods Ltd has an expected dividend next year of Rs 6 per share, which will grow at 5% perpetually. The required return is 15%. The st…
- A trader in Mumbai studies 10 years of daily closing prices of a mid-cap stock and develops rules based on past price patterns, but finds th…
- Nisha Auto Ltd has an expected EPS of Rs 15 and a payout ratio of 50%. Required return is 13% and constant growth is 8%. What is the justifi…