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

Meenakshi Textiles Ltd paid a dividend of Rs 5 per share last year. Dividends are expected to grow at a constant 6% per annum indefinitely. Investors require a return of 16%. Using the constant growth model, what is the intrinsic value per share today?

The intrinsic value is Rs 53. The next dividend is 5 x 1.06 = Rs 5.30, and dividing by the difference between required return and growth (16% - 6% = 10%) gives Rs 53. Using the last dividend instead would understate value.

  1. ARs 33.13
  2. BRs 31.25
  3. CRs 53.00Correct
  4. DRs 50.00

Explanation

D1 = 5 x 1.06 = Rs 5.30. Value = D1/(ke - g) = 5.30/(0.16 - 0.06) = Rs 53.00. Using D0 directly gives 5/0.10 = Rs 50, which ignores growth for the next dividend. Rs 33.13 is 5.30/0.16, which ignores g in the denominator.

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