CA Final · Advanced Financial Management · Financial Policy and Corporate Strategy
Meenakshi Foods Ltd expects next year's dividend of ₹6 per share, with a constant growth of 5% forever. Its equity beta is 1.2, risk-free rate is 7% and market return is 12%. Using CAPM and the Gordon model, what is the intrinsic value per share?
The intrinsic value is ₹75. CAPM gives a cost of equity of 7% + 1.2 x 5% = 13%, and the Gordon model gives 6 divided by (13% minus 5%), which equals ₹75 per share.
- A₹60.00
- B₹50.00Correct
- C₹40.00
- D₹75.00
Explanation
Ke = 7% + 1.2 x (12% - 7%) = 13%. Value = D1 / (Ke - g) = 6 / (0.13 - 0.05) = 6 / 0.08 = ₹75. This gives ₹75, so the correct option is ₹75.00; the ₹50 option arises from wrongly using Ke of 17%.
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