Skip to content

NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks

Meera, a client, wants to value a stable company using the constant growth dividend discount model. The company just paid a dividend (D0) of Rs 10 per share, dividends are expected to grow at 5% forever, and Meera's required return is 15%. What is the intrinsic value per share?

The intrinsic value is Rs 105 per share. The next dividend is Rs 10.50 after 5% growth, and dividing by the required return minus growth, 15% less 5%, gives Rs 105. Using the current dividend of Rs 10 would wrongly give Rs 100.

  1. ARs 100.00
  2. BRs 70.00
  3. CRs 105.00Correct
  4. DRs 66.67

Explanation

D1 = 10 x 1.05 = Rs 10.50. Value = D1 / (r - g) = 10.50 / (0.15 - 0.05) = Rs 105. Using D0 directly gives Rs 100, the error of not growing the dividend. Rs 66.67 uses 10/0.15, ignoring growth.

Did you get it right without looking?

One question tells you little. A timed set on Investing in Stocks shows your real accuracy, how long you take and where you lose marks.

Practise Investing in StocksFree diagnostic mock

More Investing in Stocks questions