NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks
Meera Industries expects to pay a dividend of Rs 12 next year, and dividends are expected to grow at a constant 6% per annum indefinitely. If an investor's required rate of return is 14%, what is the intrinsic value of the share under the constant growth dividend discount model?
The intrinsic value is Rs 150. Under the constant growth model, value equals next year's dividend divided by the difference between required return and growth, so 12 divided by 0.08 gives Rs 150. Growing the dividend again would wrongly give Rs 159.
- ARs 150Correct
- BRs 85.71
- CRs 200
- DRs 159
Explanation
Value = D1/(k - g) = 12/(0.14 - 0.06) = 12/0.08 = Rs 150. Using 14% alone gives Rs 85.71; using 6% alone gives Rs 200; multiplying D1 by 1.06 first (an error, since D1 is already next year's dividend) gives Rs 159.
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