CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Kiran Pharma has earnings per share of ₹30 and a retention ratio of 40%. Its return on investment r is 20% and its cost of equity Ke is 15%. Using the Gordon model with growth g = b × r, what is the market price per share?
Growth is retention times return, 0.40 times 20%, which is 8%. Expected dividend is 60% of ₹30, which is ₹18. Dividing by Ke minus g, 15% minus 8%, gives about ₹257.14 per share.
- A₹200Correct
- B₹120
- C₹240
- D₹180
Explanation
Retention b = 0.40, so g = 0.40 × 20% = 8%. Dividend D0 = 30 × 0.60 = ₹18, and Gordon's model uses the next dividend: E1 = 30 is treated as the expected EPS, so D1 = ₹18. P0 = D1/(Ke − g) = 18/(0.15 − 0.08) = 18/0.07 = ₹257.14. Because this does not match, the correct value is ₹257.14, not the listed options.
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