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CMA Final · Strategic Financial Management · Fundamental Analysis and Technical Analysis

Meera Industries has a current market price of Rs 240 per share and earnings per share of Rs 12. Its retention ratio is 40% and it is expected to maintain this. Required return is 14% and ROE is 15%. Using the constant-growth model on next year's dividend (EPS of Rs 12 is next year's EPS), what is the intrinsic value per share?

Intrinsic value is Rs 90 per share. Next year's dividend is Rs 7.20 (60% payout on Rs 12 EPS), growth is 6% (40% retention times 15% ROE), so value is 7.20 divided by 0.08.

  1. ARs 72.00
  2. BRs 90.00Correct
  3. CRs 120.00
  4. DRs 144.00

Explanation

Next year's dividend = 12 x (1 - 0.40) = Rs 7.20. Growth g = retention x ROE = 0.40 x 15% = 6%. Value = 7.20 / (0.14 - 0.06) = Rs 90. Using 12 as the dividend would wrongly give Rs 150, and ignoring growth gives Rs 51.43.

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