Skip to content

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

Mehta Textiles Ltd paid a dividend of Rs 5 per share just now. Dividends are expected to grow at a constant 6% per year, and the investors' required return is 16%. What is the intrinsic value of one share today under the constant growth dividend model?

The intrinsic value is Rs 53. Next year's dividend is 5 x 1.06 = Rs 5.30, and dividing by the difference between required return and growth (16% minus 6% = 10%) gives Rs 53. Using the current dividend of Rs 5 would wrongly give Rs 50.

  1. ARs 33.33
  2. BRs 50.00
  3. CRs 53.00Correct
  4. DRs 31.25

Explanation

D1 = 5 x 1.06 = Rs 5.30. Value = D1/(ke - g) = 5.30/(0.16 - 0.06) = Rs 53.00. Rs 50 results from using D0 instead of D1, a missed growth adjustment. Rs 33.33 would be D0 divided by (ke - g) wrongly using 15%, and Rs 31.25 is 5/0.16, which ignores growth.

Did you get it right without looking?

One question tells you little. A timed set on Equity and Bond Valuation and Evaluation of Performance shows your real accuracy, how long you take and where you lose marks.

Practise Equity and Bond Valuation and Evaluation of PerformanceFree diagnostic mock

More Equity and Bond Valuation and Evaluation of Performance questions