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

Lakshmi Foods Ltd expects a dividend of Rs 6 per share next year. Dividends are expected to grow at a constant 8% per annum, and the required return on equity is 14%. Using the Gordon growth model, what is the intrinsic value per share?

The intrinsic value is Rs 100 per share. Under the Gordon growth model the value equals next year's dividend divided by the difference between the required return and growth, so 6 divided by 0.06 gives Rs 100. D1 is already given, so it should not be grown again.

  1. ARs 75
  2. BRs 100Correct
  3. CRs 42.86
  4. DRs 108

Explanation

Under Gordon's model P0 = D1 / (ke - g) = 6 / (0.14 - 0.08) = 6 / 0.06 = Rs 100. Rs 108 results from wrongly multiplying D1 by (1 + g) again, so growing a dividend that is already next year's. Rs 42.86 comes from dividing by ke only.

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