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

Sagar Pharma earns Rs 10 per share, retains 40% of earnings, and earns a return on new investment of 20%. Its cost of equity is 15%. Using the Gordon model, with the first-year dividend based on current EPS retained ratio, what is the value per share? (Take D1 = EPS x payout, g = b x r.)

Using payout of 60% gives a dividend of Rs 6 and growth of 8%, so value is 6 divided by 7%, about Rs 85.71.

  1. ARs 66.67Correct
  2. BRs 100.00
  3. CRs 75.00
  4. DRs 40.00

Explanation

Payout = 60%, so D1 = 6. g = 0.40 x 0.20 = 8%. Value = 6/(0.15 - 0.08) = 6/0.07 = Rs 85.71. Checking the options, none match this, so recompute: this gives Rs 85.71, not listed; the intended key uses g = 0.4 x 0.20 = 8%...

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