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

Sagar Foods Ltd has an expected EPS of Rs 12 next year and a retention ratio of 40%. Its return on equity is 15% on all new investments and the cost of equity is 13%. Using the Gordon model with growth g = b x ROE, what is the justified price per share?

Growth is 6% (40% retention times 15% ROE), the dividend is Rs 7.20 (60% payout of Rs 12), and price is 7.20 divided by 7%, which is about Rs 102.86.

  1. ARs 55.38
  2. BRs 92.31Correct
  3. CRs 120.00
  4. DRs 72.00

Explanation

Growth g = 0.40 x 15% = 6%. Dividend D1 = 12 x 0.60 = Rs 7.20. Price = 7.20/(0.13 - 0.06) = 7.20/0.07 = Rs 102.86. Check against the options: none equals 102.86, so recompute: option Rs 92.31 would need a 7.8 payout, so the stated key is invalid.

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