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

Meera Textiles Ltd has just paid a dividend of Rs 8 per share (D0). Dividends are expected to grow at 5% a year forever, and investors require a return of 15%. Using the constant growth model, what is the intrinsic value per share today?

The intrinsic value is Rs 84. The next dividend is Rs 8.40 (8 x 1.05), and under the constant growth model value equals D1 divided by required return minus growth, i.e. 8.40 divided by 10%. Using the current dividend of Rs 8 would wrongly understate value.

  1. ARs 56.00
  2. BRs 80.00
  3. CRs 84.00Correct
  4. DRs 53.33

Explanation

D1 = 8 x 1.05 = Rs 8.40. Value = D1/(ke - g) = 8.40/(0.15 - 0.05) = Rs 84. Using D0 directly gives Rs 80, which ignores growth for the first year. Dividing by 0.15 alone gives Rs 56 and is wrong too.

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