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

Kavya Ltd has a current dividend of Rs 2 per share. Dividends will grow at 20% for the next two years, then at a constant 6% forever. Required return is 14%. Ignoring rounding beyond two decimals, what is the value per share today? (Discount factors at 14%: year 1 = 0.8772, year 2 = 0.7695.)

The value works out to about Rs 33.69, which does not match any option exactly.

  1. ARs 33.50
  2. BRs 36.47Correct
  3. CRs 31.20
  4. DRs 38.90

Explanation

D1 = 2.40, D2 = 2.88. D3 = 2.88 x 1.06 = 3.0528. P2 = 3.0528/(0.14 - 0.06) = 38.16. PV = 2.40 x 0.8772 + (2.88 + 38.16) x 0.7695 = 2.105 + 31.580 = Rs 33.69. Rs 33.50 is not exact; the computed value is Rs 33.69.

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