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

Meera Textiles Ltd paid a dividend of Rs 4 per share last year (D0). Dividends are expected to grow at a constant 5% per year indefinitely. Investors require a return of 15%. What is the intrinsic value of one share today using the constant growth model?

The intrinsic value is Rs 42. Next year's dividend is Rs 4.20 (4 grown by 5%), and dividing by the difference between required return and growth (15% minus 5% = 10%) gives Rs 42 under the constant growth model.

  1. ARs 40.00
  2. BRs 42.00Correct
  3. CRs 28.00
  4. DRs 44.00

Explanation

D1 = 4 x 1.05 = Rs 4.20. Value = D1/(ke - g) = 4.20/(0.15 - 0.05) = Rs 42. Rs 40 results from using D0 instead of D1. Rs 28 uses ke alone (4.20/0.15).

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