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CA Final · Advanced Financial Management · Security Valuation

Narmada Engineering Ltd is expected to report EPS of ₹25 next year. It pays out 60% of earnings, its cost of equity is 12% and dividends are expected to grow at a constant 6% forever. Using the justified forward P/E from the constant growth model, what is the intrinsic value per share today?

Intrinsic value is ₹250 per share. Next year's dividend is 60 percent of ₹25, which is ₹15, and dividing by cost of equity minus growth (12 percent minus 6 percent) gives ₹250. This equals a justified forward P/E of 10 on forward EPS.

  1. A₹250Correct
  2. B₹265
  3. C₹125
  4. D₹167

Explanation

Forward P/E = payout / (ke − g) = 0.60 / (0.12 − 0.06) = 10. Value = 10 × ₹25 = ₹250 (check: D1 = 15; 15/0.06 = 250). ₹265 wrongly grows the payout by (1+g), which suits trailing P/E, and ₹125 wrongly divides by ke alone.

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